Evaluating Funds Part IV: The Tiniest of The Tiny

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

Micro caps and Nano caps are the focus of this post.

These are the smallest investable companies available—any smaller and you’d be investing in a small business to help them start up, stay open (hopefully not) , or grow (hopefully) as an angel investor possibly.

I don’t advise anyone delve into this until they have not only planned out their critical mass of index funds, but also built it up to a significant amount (ie, a million dollars or greater). If it takes ten years (or even longer) to build that first (yes, first—if it’s the only million by the time you retire, you’ve got serious problems) million dollars with index funds, then fine—you’re just not ready financially or experience wise to invest in this space.

If you thought the small caps could suffer significantly before the rest of the economy, the micro caps and nano caps not only do that, but may not even survive a major downturn in the economy given their tiny size and inability to raise capital and/or finance debt when it is needed most. So buyer beware…

Nano caps do not have any long term reliable funds that you can invest in to capture their growth, so if you’re investing in nano caps, you’re doing it company by company on your own or possibly even worse via a new fund with no track record.

DO YOUR HOMEWORK BEFORE YOU LEAP INTO NANO CAPS!!!

So on to the micro caps then…

There are four US based micro cap ETF’s with a track record listed in order of size (ie, assets under management):

  1. iShares Micro-Cap ETF (IWC) (begun 8/17/05) holds just over 1,300 stocks each with an average market capitalization just below $500 million. It seeks to track the Russell Microcap Index (which excludes the 2,000 largest [by virtue of their respective market capitalizations] US based publicly traded companies). The fund’s expense ratio is 0.60%. It has over a billion dollars in assets under management.This is the grandaddy of the micro cap ETFs and the gold standard.
  2. First Trust Dow Jones Select MicroCap ETF (FDM) which launched in 9/30/05 tracks the Dow Jones Select Microcap Index which is limited to just stocks listed on the New York Stock Exchange (NYSE). The ETF has just over 500 stocks with over $100 million in assets under management and an expense ratio of 0.60%.
  3. Guggenheim WIlshire Micro-Cap ETF (WMCR)* which launched on 9/21/06 tracks the WIlshire Micro-Cap Index. It holds over 800 stocks with an average market capitalization of under $200 million which is the smallest average market cap of these four ETFs, It’s expense ratio is 0.59% The assets under management for this fund is <$100 million.
  4. PowerShares Zacks Micro Cap Portfolio ETF (PZI)* which launched on 8/18/05 holds just over 400 stocks, eah with an average market capitalization of just over $400 million. It is the smallest of the four ETFs at <$50 million. The fund’s expense ratio is 0.50%.

*Of note, the last two ETfs are now under the management of investment firm Invesco.

Keep in mind, you’re under zero obligation to follow through with any of these investments. If you have serious reservations or doubts or anxiety about investing in such small companies that you’ve never heard of and likely know nothing about which can get crushed with any big downturn in the economy, don’t get FOMO (ie, fear of missing out) because you’re not.

Never forget this: Some money isn’t worth making.

See you next time as we start in on evaluating funds of other kinds.

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…