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  A Snapshot of Micro-Cap Stocks vs. Small-Cap Stocks
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View from the Observation Deck 

  1. The U.S. Securities and Exchange Commission (SEC) defines micro-capitalization (micro-cap) stocks as companies with a market value of less than $250 or $300 million. Some money managers may stretch it to the $1 billion mark or so in order to expand the universe of stocks and/or increase liquidity, in our opinion. 
  2. As of 2015, there were over 20,000 publicly traded companies and more than 60% of them were micro-caps, according to The MicroCap Conference, which defines a micro-cap company as one that is valued at less than $500 million. Micro-caps account for less than 3% of total equity market capitalization.
  3. Due to their low valuation levels, micro-cap companies tend to receive little attention from equity analysts, according to U.S. News & World Report.
  4. This shifts more of the fact finding onus to the investor. For those investors without the time or resources to perform such research, there are various products they can turn to, such as mutual funds and exchange-traded funds.
  5. The greater the risk, the greater the expected return. As indicated in the chart, the Dow Jones Micro-Cap Index posted higher total returns than the Russell 2000 Index (small-caps) in each of the time periods featured.
  6. For the 15-Year period ended 10/28/16, the Dow Jones Micro-Cap Index posted an average annualized total return of 10.58%, compared to 8.30% for the Russell 2000 Index.
  7. Micro-cap companies tend not to be multinational in scope, so they are more heavily influenced by the state of the U.S. economy, which currently looks attractive relative to most developed foreign economies, in our opinion.

The chart and performance data referenced are for illustrative purposes only and not indicative of any actual investment. The index performance data excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. There can be no assurance that any of the projections cited will occur. The Dow Jones Select Micro-Cap Index represents the "investable" portion of U.S. micro-cap companies traded on the major U.S. exchanges.  The Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 8% of the total market capitalization of the Russell 3000.

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Posted on Tuesday, November 1, 2016 @ 1:43 PM • Post Link Print this post Printer Friendly

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
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