If you want big returns, sometimes it pays to think small. But why stop at small when you can go micro?
That’s right. While the vast majority of investors (and media members, too!) place their attention on large- and mid-cap stocks, small caps often slip under the radar, and their smaller cousins — micro-cap stocks, move around almost unnoticed!
But this lack of attention provides a lot of potential for tapping into market inefficiencies. Thus, the best well-managed micro-cap stock funds can take full advantage of this potential for stronger relative performance.
Relative to large-cap stocks, the market risk is greater for small-caps and even more so for micro-cap stocks, but there is no argument that smaller companies average greater growth than the larger, well-established companies over time.
So, any long-term investor would be wise to add some micro-cap stock exposure to a diversified portfolio — via the safer route of mutual funds, of course. Today, we look at three of the top funds for investing in micro-cap stocks.
Top Funds for Micro-Cap Stocks: Bridgeway Ultra-Small Company Market (BRSIX)
With strong performance, extra-small average market cap and low expenses, Bridgeway Ultra-Small Company Market (MUTF:BRSIX) is a solid choice of micro-cap stock funds.
The average market cap for the S&P 500 Index is $55.1 billion. The stocks in the small-cap Russell 2000 Index have an average market capitalization of approximately $1.6 billion.
The average market cap for holdings in BRSIX? A tiny $234 million.
Holdings include companies without big-name recognition like barbecue purveyor Famous Dave’s of America Inc (NASDAQ:DAVE) and female infertility treatment company OvaScience Inc (NASDAQ:OVAS).
This is an astonishingly forward-looking fund. Average tenure of the management team is more than 10 years, and while the buy-and-hold nature (turnover is only 29%) can cause the fund to lag in the short term, as a long-term holding you can’t get much better than BRSIX. The 15-year annualized return is 10.7%, compared to just 6% for the S&P 500.
This fund is easy on the wallet, too, with no load and just 0.72%, or $72 annually for every $10,000 invested. Minimum initial investment is small, too, at $2,000.
Top Funds for Micro-Cap Stocks: Driehaus Micro Cap Growth (DMCRX)
If performance is your main driver in selecting mutual funds, you’ll want to take a look at Driehaus Micro Cap Growth (MUTF:DMCRX).
Past performance is no guarantee of future results, but DMCRX stands as good a shot as any to repeat strong performance in the future.
The fund came live in January 2003, and co-managers Michael Buck and Jeffrey James have been at helm since the beginning. This gives them credit for the entire performance history of the fund and provides clues about the future.
DMCRX beats both the S&P 500 Index and the Russell 2000 Index for three-, five- and 10-year annualized returns, which is exactly what an investor would expect from a well-managed micro-cap stock fund. Year-to-date 2015 also looks encouraging with a 2.3% gain from DMCRX, compared to -0.3% on the S&P 500.
Top holdings at the moment include fat-reduction med-tech company Zeltiq Aesthetics Inc (NASDAQ:ZLTQ) and cardiovascular medical device company Spectranetics Corp (NASDAQ:SPNC).
The expense ratio of 1.59% is above the category average but could be worth it in the long run. The minimum initial investment also is high at $10,000, but still reasonable for a quality micro-cap stock fund.
Top Funds for Micro-Cap Stocks: TFS Small Cap (TFSSX)
Often the best micro-cap stock funds are those with low assets under management, and TFS Small Cap (MUTF:TFSSX) helps prove this point.
With just $106 million in assets, the management team for TFSSX is small enough to quickly and strategically move in and out of positions. With a high turnover ratio of 579%, the TFS Small Cap portfolio holdings have been bought and sold, on average, more than five times in the past year.
But the strategy, which overall is to outperform the Russell 2000 Index, is evidently working. Since inception in 2006, TFSSX has outperformed the Russell 2000 every year except one. The three- and five-year annualized returns place the fund ahead of more than 90% of its category average.
One slight caveat is that the average market cap for TFSSX is just more than $1 billion, which is below that of the Russell 2000 ($1.6 billion) but still larger than other funds focusing on micro-cap stocks.
The expense ratio for TFSSX is 1.54% and the minimum initial investment is $5,000.
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.
