David Snowball, PhD, publisher of MutualFundObserver.com, an independent mutual fund–analysis website that tracks 36,000 investment products. He also is professor of communications studies at Augustana College, Rock Island, Illinois.
Bottom Line: Microcaps have several advantages in the current market
You probably have never heard of most microcaps—companies with market capitalizations of just $50 million to $500 million. As a group, they returned 15.4% this year through August 31, versus 14.3% for small-cap stocks, 8.2% for mid-caps and 10.1% for large-caps, based on Russell indexes. Examples of microcap stocks include Napco Security Technologies, an alarm systems firm, and Genesis Healthcare, which provides skilled-nursing facilities.
Microcaps are benefiting much more than large companies from new corporate tax cuts (because large companies already had tax loopholes) and from the robust US economy (because unlike large companies, they tend to do almost all their business within the US). An added allure is that Wall Street hardly pays attention to them, meaning that you can invest in little-noticed, fast-growing businesses before the herd pushes up their stock prices even further.
The catch: Microcap stocks can be very volatile—for example, they were 40% more volatile, on average, than the broad stock market over the past decade. One way to sidestep some of this volatility is with a fund that invests in a range of microcaps. My favorites…
Teton Westwood Mighty Mites AAA (WEMMX). Wall Street legend Mario Gabelli fills his 500-stock portfolio with manufacturers and consumer-service businesses that have strong growth potential. The fund has been only a little more volatile than the S&P 500. Performance: 10.9%.*
Wasatch Micro Cap Value (WAMVX), which also has kept volatility comparatively low, invests in about 100 stocks. Performance: 13.4%.
AMG Managers Emerging Opportunities (MMCFX) invests in about 300 stocks and has 20% of assets in tiny tech firms. Performance: 12.8%.
*All performance figures are 10-year annualized returns through August 31, 2018.