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ETF Specialist

Micro-Caps Under the Microscope

An up-close look at common characteristics of the market’s smallest names.

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Micro-cap stocks may be unfamiliar to many. Investors can be forgiven for overlooking this segment of the U.S. stock market, which, per CRSP’s definition, accounts for 2% of the total investable market capitalization of the U.S. stock market. But micro-cap stocks can play a role in a portfolio, even if it is a bit part. This asset class offers low correlations with the upper reaches of the market-cap ladder. It might also serve as a more liquid, less costly, and more readily accessible proxy for a private equity allocation.

However, this asset-class is not without its drawbacks. Chief among these are greater volatility and limited liquidity and capacity. Also, for fund investors, there are few options for exposure to this sliver of the market. It is a market segment where indexing is challenged. Fortunately, there are some better alternatives. 

Venkata Sai Uppaluri does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.