3 Best Micro Cap ETFs and Why They're Bittersweet

Micro cap stocks are smaller than small cap stocks, and thus would be expected to pay more of a risk premium. Here we'll check out the best micro cap ETFs and explore the problems with the cap size.

// TIMESTAMPS:

00:00 - Intro
00:11 - Why Micro Caps?
01:31 - The Problem with Micro Cap Funds
02:43 - Micro Cap ETFs
02:52 - IWC
03:38 - FDM
04:27 - DWMC
05:31 - Conclusion & Outro

// SUMMARY:

Micro cap stocks are smaller than small cap stocks. It's somewhat of a forgotten segment of the market, as these stocks are the most volatile, and there aren't many products available to capture them.

Since we can't readily access micro cap value, we're essentially placing a larger bet on beta by buying a micro cap fund.

Some even consider micro caps a proxy for private equity, with comparatively greater transparency and liquidity.

The problem with most micro cap funds is that they're usually not really micro cap funds. This is because micro cap stocks by nature aren't very investable due to their relative illiquidity and extreme volatility. Ironically, the theory goes that micro caps pay a significant premium precisely because of that illiquidity and volatility. Moreover, the policies of asset management companies typically prevent fund managers from buying these illiquid, low-price-per-share stocks.

There are currently only 3 micro cap ETFs available, all of which are suboptimal and bittersweet in their own way. Here they are:
IWC – iShares Micro-Cap ETF
FDM – First Trust Dow Jones Select MicroCap Index Fund
DWMC – AdvisorShares Dorsey Wright Micro-Cap ETF

On paper, the micro cap equities segment looks like an extremely attractive investment. Unfortunately, at this time, the attempts at implementation fall extremely short, with no great options readily available to retail investors. Most micro cap funds are not truly micro caps, and nothing exists to specifically target micro cap value.

#microcapstocks #microcap #microcapstock

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[OptimizedPortfolio]

What do you think of micro cap stocks and micro cap ETFs? Do you own any?

[daveschmarder-]

I've never owned a microcap fund. The closest I came was VIOO. With an AUM of 2.2 B and an ER of 0.10%, that could satisfy many looking in that area. I currently own some AVUV which is good enough for me. You gave a good presentation of the market that doesn't get much coverage.

[NATOnova]

thanks for talking about this extremely niche sector! Shame there's not even a half decent ETF for this, but seems like a classic example of academic theory not always translating well in practice. would love to see a decent microcap value ETF. What do you think the chances are Dimensional will convert DFSCX to an ETF? They've recently done so with a couple other ETF's and apparently they're already one of the largest ETF issuers.

[marktkimball]

It seems like AUM is definitely an issue with most of these micro-cap ETFs (aside from IWC). In general, what do you consider too low of an AUM on an ETF to consider for investing? Your video had me look at a recent ETF I put a small position into (GDE) which has just over $10M AUM which I guess is low and now makes me a tad worried about that position.

[GarrettOHara]

Why not AVSC? Smaller average market cap than DFSCX despite the name.

[chadify]

If only BRUSX (Bridgeway Ultra Small Company Fund) had an ETF eh?

[M]

I own a few micro cap stock from polish stock market:
Lokum Deweloper, Ferro, IMS

[mere_cat]

It seems like there will never be a true microcap fund with widespread adoption. The whole benefit of microcap stocks is that they are small with low market caps and low liquidity and thus higher growth potential and possible risk adjusted return. Putting them in an easily accessible ETF kind of defeats the purpose.