hmorgan

Alan Abelson on Small-Cap ETFs (IWM, IJR, IWC, PZI)

I find the emergence of the two new Microcap ETFs a bit puzzling. On the one hand the two sponsors say "Look at what we have to offer.....liquidity in Micro Caps"
Liqudity is essentially the main barrier to entry for money managers...we don't like to buy things we can't sell...quickly.
So now we are offered the liquidity of ETFs with the asset class characteristics of MicroCaps. But I see a problem.

The problem is that the sponsors (Barclays & Powershares) seem to recognize the illiquidity of the asset class too. Barclays for example has 1/2 of the portfolio in the bottom 1000 securities of their small cap portfolio (Russell 2000 IWM) causing serious overlap. On top of that, they go all the way down to companies with a $50mm market cap.....this could potentially cause extreme price movements in these smallest of companies should investors flock to create or redeem shares.
This may be a classic case of the fund business creating product where demand exists despite the challenges presented by the market place.

Herb Morgan