Like PZI, FDM has a tweaked index methodology that is not based solely on market capitalization. Components are selected based on liquidity and fundamentals from the designated size range, as defined by the two smallest size deciles of stocks listed on the NYSE Arca (though components are selected from both Nasdaq and the NYSE). However, this tweaked methodology has served FDM well—it outperformed the rest of its peer group in 2007 and 2008, and year-to-date is fairly close on the heels of the second-best performer as of the end of October.
FDM has an average market capitalization of $316 million—more than IWC, but less than PZI. FDM also has fewer stocks than either fund—just 270 holdings. Of those, the top five are ATP Oil & Gas Corp, 1.18 percent; Albany International Corp., 0.90 percent; Dollar Financial Corp., 0.82 percent; Evercore Partners Inc., 0.84 percent; and Manhattan Associates, Inc., 0.83 percent.
The final ETF in this asset class is the Claymore/Sabrient Stealth ETF (NYSE Arca: STH). The fund tracks an index of 150 stocks selected from a group of securities—including stocks, ADRs and MLPs—with “little or no Wall Street analyst coverage” based on their growth characteristics. The selection universe of roughly 2,100 securities tends to fall in the small-cap and micro-cap spectrum, with most having market capitalizations of less than $3.5 billion. According to Morningstar, the fund has the highest average market capitalization of this group, at $537 million. At that level, some might question whether it’s truly a micro-cap fund, but we’ve included it here for good measure.
The top five holdings include GenCorp Inc., 1.83 percent; Harvest Energy, 1.8 percent; Alexandria Real Estate Equities, 1.43 percent; Omega Healthcare Investor, 1.41 percent; and Baytex Energy Trust, 1.37 percent. The portfolio includes a variety of ADRs (more than 10 percent of the portfolio’s securities), so there is a significant international influence. That doesn’t seem to have helped its performance, however: STH was the worst-performing ETF in the asset class in 2007 and the second-worst in 2008. It’s currently seeing an upturn though, and is in second place, year-to-date.
STH is the smallest fund in this group, with just $3.7 million in assets. It carries an expense ratio of 60 basis points.
So which one should you buy? FDM is a consistent performer, though the time frames are rather narrow. IWC is close on its heels, but IWC is also the most expensive fund in this category, charging 8 more basis points than the rest.
FDM’s main drawback is mainly its lack of significant assets, which could affect tradability, particularly for a micro-cap fund. Given its strong liquidity, broad market coverage and brand name recognition, IWC is a solid, safe bet for most investors. If you think an index that screens stocks for certain features could be a winner in a category like micro caps, where many folks are wary of the risks inherent in these tiny stocks, FDM would likely be your best choice. Should you like this approach and have concerns about FDM’s liquidity, PZI also has a modified methodology and adequate assets, though it has under-performed the others.
STH offers a different twist on the micro-cap universe, with its “neglected stock” strategy and inclusion of ADRs. Unfortunately, so far, stealth hasn’t equaled positive performance for the fund; and with just $3.7 million in assets, we worry that STH could be so stealthy that it disappears …