Which microcap?

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gabo
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Which microcap?

Post by gabo » Sun Jul 22, 2007 7:10 pm

I'm trying to add some exposure of microcap to mi portfolio. Does anybody have any recommendation of any good one???
I read Rick Ferri's book "all about asset allocation" and he suggests BRSIX as an option.
Gabo

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White Coat Investor
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Post by White Coat Investor » Sun Jul 22, 2007 7:35 pm

BRSIX is a fine option. There are lots of other choices too. It is my highest cost fund and time will tell if the cost is worth it.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

grok87
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RZV

Post by grok87 » Sun Jul 22, 2007 7:50 pm

This is not a dead-ringer but I'm considering RZV- the Rydex small cap pure value. It is 45% microcap vs. BRSIX 75%. Expense ratio of 0.35%.

cheers
grok

stebul
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Re: RZV

Post by stebul » Sun Jul 22, 2007 8:40 pm

grok87 wrote:This is not a dead-ringer but I'm considering RZV- the Rydex small cap pure value. It is 45% microcap vs. BRSIX 75%. Expense ratio of 0.35%.

cheers
grok
I am considering the same, but I am concerned that there just is not enough liquidity in RZV. The average daily volume over the past 3 months is just 5382 shares/day and total value of shares outstanding is $28M. Multiplied out, the 0.35% ER works out to $98K/year in management fees -- which makes me think long term viability could be in question if more assets aren't brought in.

I'm also curious if Rydex's new owner (Security Benefit) will raise expense ratios. They currently offer a family of high ER, high load, 12b-1 fee funds that is not appealing to Diehards.

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Bounca
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Post by Bounca » Mon Jul 23, 2007 6:51 am

More risky but my %5 of portfolio is with PRCGX.

clay
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Isn't BRSIX closed?

Post by clay » Mon Jul 23, 2007 4:11 pm

Isn't BRSIX closed to new inversters?[/b]

SmallHi
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Post by SmallHi » Mon Jul 23, 2007 4:24 pm

RZV has less than 200 stocks, BRSIX has less than 600 last time I checked.

These are two entirely different portfolios. Both have 5 to 10X less stocks than the entire universe of companies they are designed to target. (BRSIX is more diversified as a % of its target market than RZV is, but I wouldn't really call either all that diversified for the most part -- for example, I know actively managed SV funds with more stocks than RZV).

SH

xenial
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Re: Isn't BRSIX closed?

Post by xenial » Mon Jul 23, 2007 4:28 pm

clay wrote:Isn't BRSIX closed to new inversters?[/b]
No, BRSIX is open.

Best wishes,
Ken

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Blackhawkzone
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Post by Blackhawkzone » Mon Jul 23, 2007 4:51 pm

iShares Microcap Index Fund (IWC). E/R: 0.60%. This ETF tracks the Russell Microcap Index (the 1000 smallest stocks of the Russell 2000 index, plus the next 1000 largest stocks smaller than those in the Russell 2000 index).

http://www.ishares.com/fund_info/holdin ... symbol=IWC

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Post by Latestarter » Mon Jul 23, 2007 7:54 pm

Blackhawkzone wrote:iShares Microcap Index Fund (IWC). E/R: 0.60%. This ETF tracks the Russell Microcap Index (the 1000 smallest stocks of the Russell 2000 index, plus the next 1000 largest stocks smaller than those in the Russell 2000 index).
See the March 10 discussion about IWC & BRSIX: http://diehards.org/forum/viewtopic.php ... 046233c99a

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gabo
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Post by gabo » Mon Jul 23, 2007 8:15 pm

Thanks guys for the input. I guess I'll end up choosing either BRISX or IWC.

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RiskAverse
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Post by RiskAverse » Mon Jul 23, 2007 8:48 pm

Blackhawkzone wrote:iShares Microcap Index Fund (IWC). E/R: 0.60%. This ETF tracks the Russell Microcap Index (the 1000 smallest stocks of the Russell 2000 index, plus the next 1000 largest stocks smaller than those in the Russell 2000 index).

http://www.ishares.com/fund_info/holdin ... symbol=IWC
There is also the Powershares Zacks Microcap (PZI) @ 60bp as well.

The Rydex Pure Value SP600, is not a microcap ETF per se, but instead follows the pure value version of the S&P 600 which includes only stocks with a value style, and then weights them by according to value score.

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Robert T
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Capturing micro-cap returns

Post by Robert T » Mon Jul 23, 2007 9:41 pm

.
The common approach to capture index returns is to simply own all the stocks in the underlying index – thereby minimizing tracking error. As stocks exit the index they are sold by the tracking fund and vice versa. For micro-caps (illiquid securities) this leads to significant trade costs which can be as much as 1.9% of the stock price for the smallest 20% of stocks (at least according to the work by Keim and Madhavan) which can significantly reduce the ‘micro-cap premium’ observed in the CRSP data.

DFA Micro-cap fund

Investment rules: To offset these trade costs many funds apply investment rules to reduce the most illiquid stocks and expand buy ranges to reduce turnover. For example the DFA micro-cap fund has investment rules that may lead to significant tracking error against the CRSP 9-10 index (but lower trade costs) – the rules include (as I understand them from the Keim paper):
  • · excluding very illiquid stocks (e.g. limited partnerships, bankrupt firms, Nasdaq national market system stocks with fewer than four market makers, and non-NMS stocks).

    - excluding low-priced stocks (stocks with prices less than $2 or market capitalization less than $10 million).

    - waiting six months to one year before investing in an IPO.

    - maintaining sell ranges that extends to more liquid, larger cap stocks than included in the target universe (hold stocks until they grow into the upper half of the 8th decile).
Applying these rules results in a DFA portfolio of about 2,400 stocks relative to the CRSP 9-10 index of about 3,400 stocks (latest number I have seen) and has led to annual return tracking error relative to the CRSP 9-10 index ranging from +9.8% in 2000 to -18% in 2003.

Trading strategies: In addition, DFA employs various trading strategies to reduce costs when it has to trade. Its block trading approach over the period 1982-1995 led to trade costs that were 2.1% lower than the average trade costs of stocks in the Russell 2000 – or in other words has added 2.1% to returns. This trade strategy has improved over time – adding about 2.8% to returns by 1995.

The result: The combined effect of the above investment rules and trading strategies led to a larger cap, growth tilt to the DFA micro-cap fund relative to the CRSP 9-10 index that it tracks – at least over the 1982-1995 period (from Keim paper). Over 1982-2005 the returns of the DFA micro-cap fund and CRSP 9-10 index were 13.94% and 12.95% respectively. So slightly ahead of the index returns.

Bridgeway Ultra-small company fund

The Bridgeway fund targets an even smaller and more illiquid set of stocks (CRSP 10) than the DFA fund and also applies trade rules and trading strategies to reduce trade costs. And adds another criteria – tax management. So arguably its tracking error relative to CRSP 10 is expected to be larger than the DFA fund relative to CRSP 9-10. The Bridgeway fund comprises about 600 stocks relative to the 1,800 stocks of the CRSP 10 and its tracking error has ranged from 13.6% in 2000 to -12.9% in 2003. From 1998 to 2006 its annualized return was 16.2% versus 14.6 percent for the CRSP 10 (from numbers I have) – so its ahead of its benchmark but tracking error from 2003-2006 has been fairly large and negative.

Other microcap index funds

My concern is that if micro-cap ‘index’ based ETFs apply simple index type buy and sell strategies (i.e. simply sell when stocks exit the index and buy when stocks enter the index) and make no or little attempt to reduce trade costs then they may lead to disappointing results. Sinquefield’s analysis of small cap strategies indicated that small cap ‘pure index’ funds that placed a premium on reducing tracking error irrespective of trade cost (associated with the illiquid nature of small/micro cap stocks) under-performed those which paid attention to reducing these costs. The iShares microcap fund may pay attention to trade costs but it doesn’t seem to be as explicit a strategy as in the DFA and Bridgeway funds. Time will tell which approach out-performs.

Just my take (for full disclosure I own shares in the Bridgeway fund)

Robert

For reference:

An Analysis of mutual fund design: the case of investing in small-cap stocks – Donald Keim

Execution costs and investment style – Keim and Madhavan. Journal of Financial Economics (couldn't get the link to work)

Are small stock returns achievable – Sinquefield. Financial Analyst Journal 1991
.

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Rick Ferri
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Post by Rick Ferri » Mon Jul 23, 2007 10:51 pm

PowerShares has a decent fund also. It tracks the Zacks Micro Cap index (PZI). The returns are most similar to the DFA Micro Cap fund.

Rick Ferri

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zhiwiller
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Post by zhiwiller » Tue Jul 24, 2007 10:08 am

I'd like to second Rick's mention of PZI. I help my parents with their accounts and they have held this pretty much since inception.

I used to hold BRSIX, but the tracking error made me uncomfortable. In retrospect, I think it gets most of its love from having an amazing 2003. Returns before and since then have been unspectacular. YTD it is in the bottom decile of small blend funds, according to M*. I'd rather stick with a real index than a managed fund that tries to act like an index, but I'm sure you will be fine with either.

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