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Gain Exposure to Microcaps Through ETFs

While it's getting more difficult to find cheap and interesting names in that space these days, performance of the group, as represented by the Russell Microcap Index has been very solid year to date, with the index up 17.3%. If you want small and cheap, it's well represented by this index, and it's 1.1 price to book ratio.

Unfortunately, you can't buy the Russell Microcap Index outright, (or its sub-indices, growth and value) but you can gain exposure through an exchange traded fund, the iShares Russell Microcap Index (IWC). This ETF provides exposure to the smallest of the small, representing about 3% of the overall market cap of listed U.S. equities. With 1,467 names in the portfolio, the expense ratio at 0.69% is reasonable, if not cheap, considering the nature of typically higher trading costs associated with micro-caps.

As of Sept. 30, the average market cap of IWC's holdings was just $326 million, with the smallest name at just under $6 million, and the largest at $832 million.

You can get exposure to darn near every index through ETFs these days.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.

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