Micro-Cap Funds Under the Microscope

The iShares Russell Microcap Index Fund ranks at the top of a limited number of micro-cap ETF choices.
Publish date:

NEW YORK (TheStreet) -- In the first months of 2010, aiming small has paid off in a big way. Both small- and micro- cap ETFs have managed to handedly beat the broad S&P 500 Index.

Typically, investors are attracted to small- and micro-cap companies for their greater growth potential. However, as the size of the companies underlying a fund get smaller, they tend to see wilder swings to the up and downside. For this reason, it makes even more sense to diversify, especially with the smallest of small caps, the microcaps.

There are dozens of products available to investors looking for exposure to small-cap firms. However, the options for investors interested in micro-cap ETFs are limited. Currently, only three ETFs bear mention: the

iShares Russell Microcap Index Fund

(IWC) - Get Report

; the

PowerShares Zack's Micro Cap Portfolio


; and the

First Trust Dow Jones Select MicroCap Index Fund

(FDM) - Get Report


IWC is the largest of these three ETF options, with $440 million in assets.

Due to the small size of the fund's underlying holdings, IWC does not have any holding which can drive the product's performance. The fund's No. 1 position,

Dana Holdings

(DAN) - Get Report

, accounts for only 0.7% the total index.

Together, IWC's top 10 positions make up less than 5% of the fund. Other top holdings include,

Veeco Instruments

(VEC) - Get Report




, and

Dollar Thrifty Automotive Group



The largest sectors represented in IWC's portfolio are financial services, technology, health care and consumer discretionary. Together, these four industries account for nearly three quarters of the fund. Financials represent the largest slice, commanding over 23%.

IWC carries a 0.68% expense ratio.

PZI also has a heavily diversified index.

Keryx Biopharmaceuticals

(KERX) - Get Report

is the fund's largest holding, but makes up less than 0.5% of the total index. Other top holdings include

RAIT Financial Trust



Federal Agricultural Mortgage Corp

(AGM) - Get Report




. PZI's top 10 positions represent 4% of the fund.

Once again, a small number of sectors make up the lion's share of PZI's portfolio. This time, however, it is consumer discretionary, with a 23% slice, making up the largest chunk. Financials, technology and industrials together represent another 50% of the fund.

PZI carries a 0.86% expense ratio.

With nearly $23 million in assets, FDM is the smallest of the micro-cap ETFs. The fund's three top holdings:

EV Energy Partner



ATP Oil & Gas


, and



each represent 1% of the fund. Together, FDM's top 10 holdings make up over 9% of the fund.

While, in looking at its holdings, FDM is the most concentrated of the three: from a sector perspective, it is the most diverse. Industrials account for 18.5% of the fund. The next largest slices: financials, consumer discretionary, and tech account for 47% of the fund.

FDM carries the highest fee among all three micro cap funds. Investors are charged 0.94%.

Interestingly, only a little more than a month separates the eldest of these funds to the most recently launched. However, despite their near identical launch dates, these three products have varied considerably in their ability to attract investors. Shares of IWC change hands over 200,000 per day while FDM has an average volume of 16,000. PZI's volume is 24,000.

Taking fees, volume and performance into consideration, the clear choice among micro-cap ETFs is IWC. Investors holding this fund in 2010 have seen 22% returns versus the 18% returns for

iShares Russell 2000 Index

(IWM) - Get Report

. PZI is also up about 22%, and FDM is up 16%.

Investors wary of using ETFs to play micro-caps may find the

Perritt Micro Cap Opportunities Fund

(PRCGX) - Get Report

more to their liking. This fund's manager avoids investing in start ups and invests in companies with little to no debt. Since the start of the year, the fund has risen over 15%.

As of March 30, technology and industrial firms represent the two largest slices of PRCGX, making up 19.3% of the fund each. The health care and consumer discretionary sectors make up an additional 24%.

Top holdings include

Health Grades



Star Gas Partners

(SGU) - Get Report



(BIOS) - Get Report




Together, the fund's top ten holdings account for over 14% of the fund.

PRCGX carries a heavier expense ratio than micro-cap ETF options. Investors are charged 1.42% to hold the fund.

PRCGX is not for short-term traders. The penalty for holding this fund for less than 90 comes in the form of a 2% redemption fee on shares.

-- Written by Don Dion in Williamstown, Mass.

At the time of publication, Dion Money Management is not long on any equities mentioned.

Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.