The biggest stocks get a lot of fanfare, but Wall Street's tiniest companies have yielded even greater rewards in recent years. Microcap stocks perform differently...
NEW YORK — The biggest stocks get a lot of fanfare, but Wall Street’s tiniest companies have yielded even greater rewards in recent years.
Microcap stocks perform differently from larger issues, but investing in corporate America’s incubator can be tricky.
There are plenty of ways to invest in large-caps, including many mutual and exchange traded funds that track the Standard & Poor’s 500. But there aren’t many options for investing in the smallest stocks.
This is mostly because of issues of liquidity. Microcaps typically have small trading volumes, so it’s difficult to maintain a fund of any size. When new funds appear, their asset levels grow quickly. They lose their edge and typically are closed to new investors.
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Professional money managers are eager to invest in microcaps because they add diversity to portfolios. The Russell Investment Group is adding a new microcap index June 24, to better evaluate the performance of this group of stocks.
“This segment of the market offers a great way for small investors to get access to these companies,” said Lori Richards, senior product manager for Russell Indexes. “A lot of these guys will be the small and midcaps of the future, and you get in on them when they’re babies.”
The company already publishes the Russell 2000 index, which is used as a benchmark for small companies. Russell 2000’s biggest company has a market cap of $1.8 billion, and the smallest is worth $176 million. But it’s dominated by stocks in the upper end of that range.
In contrast, microcap managers typically focus on stocks with market caps ranging from about $500 million to $60 million. This is a much larger group of companies.
The new Microcap Index, which aims to track the performance of the 2,000 smallest companies in the U.S. market, has some overlap with the Russell 2000. It includes the bottom fourth of stocks in the small-cap index, about 1,000 names, plus another 1,000 even tinier issues.