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Getting Active With A New Micro-Cap ETF

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Getting Active With A New Micro-Cap ETF
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Micro-cap stocks and the related exchange traded funds are delivering some impressive returns, so perhaps it is time for some additions to the fray.

Earlier this week, AdvisorShares, one of the largest issuers of actively managed ETFs, introduced the AdvisorShares Dorsey Wright Micro Cap ETF (NASDAQ: DWMC).

What Happened

“DWMC seeks long-term capital appreciation by investing in exchange-listed micro-cap equities with sufficient liquidity that have a market capitalization of less than $1 billion,” according to a statement from Maryland-based AdvisorShares.

The inclusion of stocks with market values of up to $1 billion means DWMC will hold some stocks that are defined as small caps. The new ETF is actively managed and focuses on relative strength investing.

That methodology “buys securities that have appreciated in price more than other equities within its investment universe and holding those securities until they exhibit sell signals,” according to AdvisorShares.

Why It's Important

The new ETF does not use fundamental analysis in its stock selection process. Not only does relative strength investing offer the potential to identify winning securities, but it can help investors avoid lagging stocks.

“One of the characteristics of the investment universe of micro-cap equities used for DWMC is that there is a significant amount of dispersion, meaning there are a lot of stocks that have tremendous performance and others that have dreadful performance,” said AdvisorShares. “That is great for any relative strength strategy. The portfolio manager believes that relative strength is equally good at identifying long-term winners and losers.”

DWMC charges 0.99 percent per year, or $99 on a $10,000 investment.

What's Next

AdvisorShares also introduced the AdvisorShares Dorsey Wright Short ETF (NASDAQ: DWSH).

That new actively managed ETF seeks out lagging stocks with the potential to continue falling. The portfolio will mainly be comprised of U.S. large caps.

“DWSH's dedicated short equity portfolio typically has 75-100 holdings that begin with a modified equal weighting,” according to the issuer. “At certain technical levels during severe market downturns, the strategy can allocate its short exposure more broadly to the domestic equity market — by shorting individual ETFs or futures contracts — seeking to enhance its total return.”

DWSH also charges 0.99 percent per year.

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