What is the Russell Microcap Index
The Russell Microcap Index is a capitalization-weighted index of almost 1,550 small cap and micro cap stocks that captures the smallest 1,000 companies in the Russell 2000, plus 1,000 smaller U.S.-based listed stocks. The broad index is designed to present an unbiased collection of the smallest tradable securities that still meet exchange listing requirements, so over-the-counter (OTC) stocks and pink sheet securities are excluded.
As of June 30, 2018, the index's biggest market cap was S1.53 billion, with a median stock value of $256 million.
The Russell Microcap Index is recalculated annually to prevent growing stocks from distorting index performance, and to include new entrants.
BREAKING DOWN Russell Microcap Index
According to FTSE Russell, which maintains the index, as of December 31, 2016, together, the Russell 2000 Index, the Russell 2500 (SMID) and its Microcap Index had an 86% share of institutions and consultants using small cap indexes. Alternatives to the Russell indexes include The Wilshire US Micro-Cap index introduced in 1996, the CRSP U.S. Micro Cap Index, which dates from 2011, and the MSCI USA Micro Cap Index, which launched in 2010.
Key Features of the Russell Microcap Index
While the Russell 2000 is the most commonly quoted small cap index, the Microcap Index is a valuable tool for examining trends in smaller, startup companies. Annual membership changes, which take place in June for all Russell’s indexes, occur on a much more frequent basis than they do in the larger indexes that cover mid cap and large cap stocks. 2017’s rebalancing of the Microcap index saw significant additions of healthcare names.
The current index’s top five sector weightings are Financial Services, Health Care, Consumer Discretionary, Producer Durables and Technology. Health Care (pharmaceuticals and biotech) names make up eight of its 10 largest holdings. The Microcap Index represents just 3% of the overall U.S. equity market by capitalization. In addition to the Microcap Index, Russell maintains a Microcap Growth (with 869 holdings) and a Microcap Value Index (1058 holdings).
Investing in Microcap Stocks
Microcap stocks are challenging to invest in given significant issues with liquidity and thin trading volumes. Investors looking to gain exposure to the asset class can purchase an exchange-traded fund (ETF) that replicates the Russell Microcap Index from iShares. It trades under the ticker “IWC." But there are important differences between the benchmark and iShares’ fund. For example, IWC has 1,379 holdings (as of March 2018), with its 10 largest holdings all in the Health Care sector. In addition to Health Care, Financials, Information Technology, Consumer Discretionary and Industrials round up the top five sector weights.