Russell Microcap Index: Explained, Examples, and More
BP
Summary:
The Russell Microcap Index is a comprehensive gauge of the smallest publicly-traded companies in the U.S. stock market. It comprises 1,000 securities from the Russell 2000 Index with the tiniest market capitalizations, followed by another 1,000 with the next smallest market caps. This index is valuable for investors seeking insights into the world of micro-cap stocks, although it’s important to note the heightened risk and volatility associated with these smaller companies. Let’s explore the Russell Microcap Index in greater detail, its construction, top sectors, and investment options.
Compare Investment Advisors
Compare the services, fees, and features of the leading investment advisors. Find the best firm for your portfolio.
Understanding the Russell Microcap Index
The Russell Microcap Index, often referred to as the Microcap Index, is a vital tool for investors interested in exploring the smallest publicly-traded companies in the U.S. stock market. While the Russell 2000 is the most commonly quoted small-cap index, the Microcap Index goes a step further by capturing the tiniest of the small. Here’s what you need to know:
Construction of the Russell Microcap Index
The index comprises two main segments. The first includes the smallest 1,000 securities within the Russell 2000 index, which already focuses on small-cap stocks. The second segment includes the next 1,000 smallest eligible securities based on a combination of their market capitalization and current index membership weight.
To be eligible for inclusion, securities must meet exchange listing requirements. This means that over-the-counter (OTC) stocks and pink sheet securities are excluded from the Microcap Index.
Market cap range
Microcap stocks, by definition, have market capitalizations significantly lower than large-cap or even mid-cap stocks. In the case of the Russell Microcap Index, the included stocks typically have market capitalizations ranging from approximately $50 million to $300 million.
Annual reconstitution
The Russell Microcap Index is reconstituted annually. This ensures that the index accurately reflects the evolving landscape of micro-cap stocks. It adds new and growing equities while removing those that no longer meet the capitalization and value characteristics criteria.
Top sector weightings
As of the latest data available, the Russell Microcap Index had the following top five sector weightings:
1. Financial services
2. Healthcare
3. Consumer discretionary
4. Producer durables
5. Technology
2. Healthcare
3. Consumer discretionary
4. Producer durables
5. Technology
Of particular note, the healthcare sector, which combines pharmaceuticals and biotech, held a significant presence within the index, with four of its 10 largest holdings.
Microcap Index vs. Russell 2000
It’s important to distinguish between the Russell Microcap Index and the more commonly known Russell 2000. The Russell 2000 focuses on small-cap stocks, but the Microcap Index narrows its scope even further to the tiniest of companies. This distinction is crucial for investors looking for insights into the microcap segment of the stock market.
Size in the overall market
The Russell Microcap Index represents only a small fraction of the total U.S. equity market by capitalization. As of October 2020, the index’s total market capitalization was $2.89 billion, with a median stock value of just $256 million.
Top constituents
The top 10 index constituents as of that time were as follows:
1. Overstock Com Inc (Consumer Discretionary)
2. Digital Turbine Inc (Consumer Discretionary)
3. Sorrento Therapeutics (Healthcare)
4. Workhorse Group Inc (Industrials)
5. Vivint Solar Inc (Consumer Discretionary)
6. Kura Oncology Inc (Healthcare)
7. Cryoport Inc (Industrials)
8. Owens & Minor Inc (Healthcare)
9. Maxar Technologies Inc (Industrials)
10. Seres Therapeutics Inc (Healthcare)
2. Digital Turbine Inc (Consumer Discretionary)
3. Sorrento Therapeutics (Healthcare)
4. Workhorse Group Inc (Industrials)
5. Vivint Solar Inc (Consumer Discretionary)
6. Kura Oncology Inc (Healthcare)
7. Cryoport Inc (Industrials)
8. Owens & Minor Inc (Healthcare)
9. Maxar Technologies Inc (Industrials)
10. Seres Therapeutics Inc (Healthcare)
Other Russell Microcap Indices
In addition to the Microcap Index, Russell maintains two other indices that focus on the microcap segment, each with its own specific approach:
Russell Microcap Growth Index
The Russell Microcap Growth Index is designed to measure the performance of the microcap growth segment of the U.S. equity market. This segment comprises companies within the Russell Microcap universe that are considered more growth-oriented relative to the overall market. The index is constructed based on Russell’s leading style methodology.
Russell Microcap Value Index
On the other hand, the Russell Microcap Value Index includes companies within the Russell Microcap universe that are considered more value-oriented. This index offers a perspective on microcap stocks that are expected to exhibit value characteristics.
Investing in Microcap Stocks
Microcap stocks make up less than 3% of the U.S. equity market. Investing in these smaller companies comes with unique challenges, primarily related to liquidity and thin trading volumes. Investors interested in gaining exposure to the microcap asset class can consider an exchange-traded fund (ETF) that replicates the Russell Microcap Index.
One such ETF is offered by iShares, trading under the ticker symbol IWC. It holds a diverse portfolio of microcap stocks, providing investors with a way to access this segment of the market.
Differences between the index and ETF
It’s worth noting that there are differences between the benchmark Russell Microcap Index and the iShares’ ETF. For example, the ETF includes roughly 1,400 holdings, with its 10 largest holdings all within the healthcare sector. This differs from the index, which had more diverse sector weightings. The top sectors in the ETF include healthcare, financials, information technology, consumer discretionary, and industrials.
Pros and cons of the Russell Microcap Index
Why invest in microcap stocks?
Investing in microcap stocks can be an attractive option for investors seeking to diversify their portfolios and potentially achieve high returns. Here are some compelling reasons to consider adding microcap stocks to your investment strategy:
Diversification opportunities
Microcap stocks can add a layer of diversification to your investment portfolio. By investing in
these smaller companies, you can spread your risk across a broader range of assets. This can be especially beneficial when compared to investing solely in larger, more established companies.
High growth potential
Microcap stocks are known for their growth potential. These companies are often in their early stages, and if they experience substantial growth, their stock prices can soar. While there’s risk involved, the potential for high returns can be enticing.
Market inefficiencies
The microcap market is less efficient than the market for larger companies. This means that there can be opportunities to find undervalued gems in this segment. Investors who are willing to conduct thorough research may discover stocks with significant growth potential.
Key factors to consider before investing
Before diving into microcap stocks, there are several critical factors to consider to make informed investment decisions:
Risk tolerance
Microcap stocks are inherently riskier and more volatile than larger stocks. Assess your risk tolerance and investment goals to determine whether investing in microcaps aligns with your financial strategy.
Liquidity
Liquidity can be a significant challenge when investing in microcap stocks. Due to lower trading volumes, buying and selling these stocks can be more challenging. Consider your ability to hold investments for the long term.
Thorough research
Conducting thorough research is vital when investing in microcap stocks. Due to limited publicly available information, you’ll need to dig deeper to evaluate a company’s potential. Consider factors such as the management team, industry trends, and financial health.
Real-life examples of microcap stock success
Let’s take a look at a few real-life examples of microcap stocks that have achieved significant success. These examples highlight the growth potential and opportunities within the microcap market.
Monster Beverage Corporation (MNST)
Monster Beverage, originally known as Hansen Natural Corporation, is a prime example of a microcap stock that transformed into a major player. In the early 2000s, the company was trading at just a few dollars per share. Over the years, fueled by the success of its Monster Energy drink line, the stock price soared, and it became a prominent player in the beverage industry.
Lumber Liquidators Holdings, Inc. (LL)
Lumber Liquidators, a retailer of hardwood flooring, was once a microcap stock trading at low prices. However, as the housing market rebounded and the company expanded, its stock price surged. Investors who recognized the potential for growth in the home improvement sector saw substantial returns.
Exact Sciences Corporation (EXAS)
Exact Sciences, a molecular diagnostics company, was a microcap stock with a focus on cancer screening. The development and success of its Cologuard product, a non-invasive colorectal cancer screening test, led to a remarkable increase in its stock price. The company’s innovation and growth potential attracted investors.
Conclusion
Investing in the Russell Microcap Index or individual microcap stocks can be a rewarding venture for investors with an appetite for risk and growth potential. By diversifying your portfolio, conducting thorough research, and understanding the nuances of the microcap market, you can position yourself to benefit from the opportunities within this segment. However, it’s essential to balance the potential for high returns with the inherent risk. Consider your own financial goals, risk tolerance, and investment horizon when deciding whether microcap stocks are a suitable addition to your investment strategy. Remember that informed decisions and a long-term perspective are key to success in the world of microcap investing.
Frequently Asked Questions
What is the primary purpose of the Russell Microcap Index?
The primary purpose of the Russell Microcap Index is to provide investors with a comprehensive and unbiased gauge of the smallest publicly-traded companies in the U.S. stock market. It helps investors track the performance of microcap stocks and gain insights into this specific market segment.
How often is the Russell Microcap Index reconstituted?
The Russell Microcap Index is reconstituted annually to ensure that it accurately reflects the evolving landscape of microcap stocks. This annual reconstitution helps keep the index up-to-date and relevant.
Is investing in microcap stocks suitable for everyone?
Investing in microcap stocks is not suitable for all investors. These stocks are riskier and more volatile, making them better suited for those willing to take on higher levels of risk in exchange for the potential for higher returns.
What are the key takeaways from the Russell Microcap Index?
The key takeaways from the Russell Microcap Index include insights into the smallest publicly-traded companies with market capitalizations ranging from $50 million to $300 million. It also highlights the higher risk and potential for above-average growth associated with microcap stocks.
What are the differences between the Russell Microcap Index and the iShares’ ETF that replicates it?
There are notable differences between the Russell Microcap Index and the iShares’ ETF that replicates it. The ETF includes roughly 1,400 holdings and has distinct sector weightings, with healthcare dominating the top positions. Understanding these differences is crucial for investors considering exposure to the microcap segment.
What factors should investors consider before diving into microcap stocks?
Before investing in microcap stocks, investors should assess their risk tolerance, as these stocks are inherently riskier. They should also consider the liquidity challenges associated with lower trading volumes and the need for thorough research due to limited publicly available information.
Key takeaways
- The Russell Microcap Index provides insight into the smallest publicly-traded companies in the U.S. stock market, with market capitalizations ranging from $50 million to $300 million.
- Investing in microcap stocks carries higher risk but also offers the potential for above-average growth.
- Annual reconstitution ensures the index accurately reflects the evolving microcap stock landscape.
- An ETF, such as the one offered by iShares (ticker: IWC), allows investors to access the microcap segment of the market.
- Investors should be aware of the differences between the Russell Microcap Index and the iShares’ ETF, including sector weightings.
Share this post: