iShares Micro-Cap ETF

IWC

Market cap $918M

IWC has sharply lagged the S&P 500 in the past three years. Its valuation is compelling, but we must see confirmation from the chart before a bullish view can hold water. I outline key price levels to monitor ahead of weak calendar trends.

The iShares Micro-Cap ETF seeks to track the results of the Russell Microcap Index. Most securities included in IWC have a market cap between $50,000,000 and $300,000,000. The appeal of most small-cap ETFs should be the opportunity for significantly higher gains because of the added risks associated with investing in smaller companies. IWC's structure prevents it from capitalizing on significant gains long term, as successful companies will likely outgrow the micro-cap space.

iShares Micro-Cap ETF has underperformed compared to its small, mid, and large-cap peers, delivering only a 103.5% total return over 10 years. IWC's portfolio is heavily tilted towards value stocks (52%) and has a lower exposure to growth stocks (20%), impacting its performance. The fund's low exposure to technology stocks (12.5%) dampens its growth outlook, as tech is a fast-growing sector benefiting from key megatrends.

The iShares Micro-Cap ETF provides passive exposure to U.S. micro-cap stocks, minimizing the risks associated with individual stock picking. Despite the underperformance, IWC provides diversification and, in my opinion, the potential for alpha in the future in the micro-cap market. The lowering of the Fed's interest rates has become inevitable, and this could create value in the micro-cap segment.

June inflation data has deepened the market's confidence that the Fed would begin cutting interest rates in September, leading to a sector rotation from the hot technology sector to the laggards that could benefit from falling rates like industrials and small caps.

IWC invests across a portfolio of the smallest US publicly traded companies. The fund has underperformed historically and is lagging during the current bull market. Micro-cap stocks are important, but IWC's strategy fails to impress.

The current bull market has been driven by large-cap momentum, but if you believe small-caps will lead the next phase, consider investing in the iShares Micro-Cap ETF. IWC provides exposure to micro-cap stocks, which have the potential for significant returns but also come with higher risks due to their smaller size and limited resources. The fund holds a diversified portfolio of about 1,500 micro-cap stocks, with the biggest allocation in the healthcare sector.

The Federal Reserve kept rates steady and maintained a hawkish stance toward inflation while acknowledging an outstanding economy and progress in vanquishing inflationary pressure. Expectations for rate cuts in March were dampened by a change in statement language and Powell's comments in the press conference.

Microcap investing can lead to extraordinary returns, but retail investors are at a disadvantage due to lack of information and coverage. The iShares Micro-Cap ETF suffers from this information disadvantage and has modest long-term returns. Investors should seek professional advice from experts like the Royce Micro-Cap Trust, which has outperformed the IWC ETF on all time frames.