Investing in Micro-caps

I'm working on a series of posts about various "lazy" portfolios. In the process, I've come across a couple of portfolios that invest in micro-cap stocks. These companies usually have market capitalizations between $50m and $300m or $500m, depending on whom you ask. They're not the absolute smallest stocks - there is a nano-cap category. These small companies are very risky, and these funds can be a roller coaster ride.

What I didn't know is that there's a micro-cap index, and a couple of micro-cap ETFs. Unfortunately, they haven't been around long. I'll compare them to the S&P 500 for performance, and to another micro-cap mutual fund.

iShares Microcap Index (IWC): 0.6% expense ratio. This tracks the Russel Micro-cap index minus the companies who are failing.

Powershares Zack's Micro-cap (PZI): 0.6% expense ratio. This tracks stocks between $60m and $600m. So far ( a little over a year) it's got a 78% turnover ratio! That's going to create some taxable income at the end of the year.

Bridgeway Ultra Small Company Market (BRSIX): 0.65% expense ratio. Performance has topped 99% of its peers, though I'm still working on what those peers are. The fund manager is apparently known for keeping taxable changes to a minimum. The fund has $1.18b in assets. Morningstar even comes out and recommends this fund in the analysis of the 2 ETFs! Note that they only give the fund a 3 star rating, and that lots of analysts think that the multi-year run for small cap performance is coming to an end.

Ticker	Name	2000	2001	2002	2003	2004	2005	2006
SPY	S&P 500 ETF	-9.73	-11.81	-21.54	28.18	10.7	4.83	15.85
IWC	iShares Russel Microcap Index							14.89
PZI	Powershares Zack Microcap							18.03
BRSIX	Bridgeway Ultra-Small Company	0.7	24.0	4.9	79.4	20.1	4.1	11.5