Some investment professionals discourage purchase of penny stocks claiming it’s more often than not a bad idea for serious investors. Some have earned significant returns through penny stocks, but the majority don’t see a big difference in the overall portfolio. While you will find disagreements over the wisdom of purchasing low-cap stocks, what about penny stock ETFs? Is there even such a thing? The answer is yes, but they’re known as low cap ETFs.
What are Penny ETFs?
Exchange-Traded Money is alternative investment strategies to direct stock investments. They provide investors exposures to specified markets while minimizing the risk of loss. Penny stocks are also known as small-cap or microcap stocks. These stocks are common shares of public firms that trade at low share prices. The ETFs that follow indexes correlated with microcap stocks are penny funds.
Risks of purchasing Penny ETFs
Most penny stock companies are small , they might not even be listed on the main exchanges. Some are traded over the counter and are referred to as OTC, according to Public. Penny stocks are considered a risky investment because of the low trading volume and many are offered by small companies which are still developing. Penny ETFs are utilized as a strategy for investment portfolio diversification and they're attractive because of the low investment costs.
How to find the right Penny ETFs
Microcap ETFs are an alternative to direct investment in penny stocks, but because with any investment, you will find associated risks to consider. It’s wise to investigate the fees associated with the fund before you invest, as well as considering the minimum investment required to purchase these ETFs. It pays to find out as much about the fund and its investment strategies as you can. You may ask about the duration of the contracts, the liquidity of the fund, net assets, and information about the index that the ETF tracks.
Microcap ETFs for consideration
Investopedia highlights three microcap ETFs that provide consistent daily trading volumes, stable net asset bases, and reasonable liquidity. We view these funds as the best bets coming to the end of 2021, at least for the short term, possibly longer investment options.
AdvisorShares Dorsey Wright Microcap ETF (DWMC)
We such as the diversity of DWMC’s investment strategy which includes Five 9, Inc comprised of 159 funds for greater portfolio diversity along with a healthy risk spread in the lower portion of the Russell 2000 Index coupled with other penny stocks. The majority of the holdings for the fund exist within the financial and technology sectors at 21%. The next largest investment concentration lies inside the industrial and healthcare industries at 13.50% and19.02%. The cost ratio of the fund is 1.25%. It’s is on the high end due to the active management of the fund. The fund originated from 2021. It manages approximately $1.4 million in assets.
iShares Microcap ETF (IWC)
The iShares Russell Microcap ETF is the largest fund in its class. The total net assets of this fund are gone $768.95 million. The average daily trading volume of this ETF is just under 66,000 shares with reasonable liquidity. The sector is made up mostly of individual penny stocks having a thin trading volume. This fund tracks the Russell Microcap Index performance utilizing a weighting methodology of market capitalization. The expense ratio of the iShares Microcap ETF is high at 0.60%, which is 0 .16% above the average ETF expense ratio. The entire number of holdings for this ETF is 1,358. The most heavy weighting is in the health care sector stocks at 28.01%, accompanied by the financial sector at 22.07%, and from the information technology sector at 11.2%. The rest of the fund consists of other holdings in diverse sectors from the penny stock market.
First Trust Dow Jones Select MicroCap Index Fund (FDM)
The First Trust Dow Jones Select Microcap Index Fund assigns weight based on market capitalization for its highest priority. The next considerations are trading volume, PE ratio, trailing price, and sales ratio, per-share profit change from the prior quarter, and operations profit margin. Finally, six-month total return. This weighting sequence is part of the methodology employed by fund managers. The fund tracks the Dow Jones Select MicroCap Index. The entire net assets of the fund are approximately $79.7 million. FDM may be the second-largest microcap ETF. The largest holding of the fund is Kodiak Sciences Inc at 2.59%, accompanied by a variety of penny stocks comprising the top 10 assets within the portfolio. The weighting places financial stock inside a 32.7% ratio. This is followed by industrial at 17.93%, consumer cyclical stocks at 14.98%, health care stocks at 7.98%, with a total of 205 holdings. The cost ratio for this ETF is high at 0.60%. The typical daily trading volume is thin at 4,633 shares.
While it’s difficult to get an ETF that is advertised as a Penny ETF there is plenty of microcap ETFs that are in essence, exactly the same thing. Penny stocks are popular with investors who're looking for cheap investments to diversify their portfolios, and some penny stock investments do result in a satisfactory ROI. Due to the nature of penny stocks, the risk factor is higher because most of the companies are still in their developmental stages, even after going public. There are no guarantees of success or growth/sustainability. Purchasing microcap ETFs provides exposure to the penny stock market without the blatant risks associated with direct investment in new or fledgling firms that may or may not succeed. Management of exchange-traded funds does significantly lessen the risks, however. If you’re considering investing in penny stocks, you may want to also consider the less risky strategy of investing in a microcap ETF as an alternative. The key takeaway for this type of investment is that it enables you to gain exposure to the market and get your feet in the water with a bit more confidence.