Penny equity ETFs can be a great way to diversify your portfolio. Penny stocks are loved and hated by investors at all levels. But there is no denying their potential in the market.
Keep in mind that many of today’s biggest companies were once penny stocks. At one point, Amazon (Nasdaq: AMZN) and Apple (Nasdaq: AAPL) were stocks quoted in cents. Imagine if you had invested when they were!
Some of the future market leaders are hiding among penny stocks. And it is often easier for a small business to grow than it is for large companies. The microcap sector has historically outperformed the overall market.
You can potentially score big if you get in early and hold on for the long haul. But you need to be aware of the high risks involved with these funds. First, let’s dive into the basics of penny stock ETFs …
What are Penny Stock ETFs?
An exchange-traded fund (ETF) is a collection of securities traded on an exchange. It can be a pool of stocks, commodities or bonds. These funds can provide investors with exposure to various markets and help minimize risk. They can also expand your portfolio without having to spend a lot of time and effort on individual investments.
You can invest in multiple penny stocks at a time by investing in a microcap ETF. The stocks of the funds below are common stocks of companies that trade at a low price (usually less than $ 5). These funds are an alternative to direct investment in stocks quoted in cents. It’s less work. And it’s a lot less risky than investing in a single company.
3 Penny Stock ETFs to Consider
- IShares Micro-Cap ETF (NYSE: IWC)
- First Trust Dow Jones Select MicroCap ETF (NYSE: FDM)
- AdvisorShares Dorsey Wright Micro-Cap ETF (NYSE: DWMC)
Let’s take a look at these ETFs in more detail …
IShares Micro-Cap ETF
Expense ratio: 0.60%
The iShares Microcap fund is the largest ETF in its class. This fund is made up primarily of individual penny stocks. It tracks the performance of the Russell Microcap Index. This fund has nearly 1,300 holdings.
The fund is remarkable because it has holdings in various sectors of the market. Its main holdings are in the health, finance and information technology sectors.
First Trust Dow Jones Select MicroCap ETF
Expense ratio: 0.60%
The First Trust Dow Jones Select Microcap Index Fund is the second largest microcap index ETF. This fund replicates the performance of the Dow Jones Select MicroCap index.
The stocks in this index are selected based on market capitalization, trading volume and other financial metrics. The fund is mainly made up of the financials, industrials and consumer discretionary sectors.
The fund has more than 150 stocks. The largest holding of the fund is Kodiak Sciences Inc (Nasdaq: KOD). However, the other stocks in the top 10 holdings of this ETF are all penny stocks.
AdvisorShares Dorsey Wright Micro-Cap ETF
Expense ratio: 1.32%
The AdvisorShares Dorsey Wright Micro-Cap Fund is an actively managed portfolio of microcap stocks. This fund is relatively new. But since its inception in 2018, the fund has become well known in the microcap ETF market.
This fund currently has more than 150 holdings. It is mainly made up of holdings in the technology, finance, healthcare and industrial sectors.
This fund has an expense ratio of 1.32%. The high expense ratio is due to the active management of the fund. Most microcap ETFs passively invest in stocks in their benchmark index. This fund has a portfolio manager who systematically selects microcap stocks to include top-ranked stocks.
Risks of Investing in Penny Stock ETFs
Investing in penny stock ETFs requires a higher level of risk tolerance than the average investment. These funds are not for risk showers.
Penny stocks and microcaps are considered risky investments for several reasons. Many of these stocks are traded over-the-counter. Because they’re not listed on a major stock exchange, they don’t have to follow the same rules designed to protect investors.
These actions also come with a level of anonymity. Fewer financial analysts and gurus follow small stocks compared to their larger counterparts. And many of these businesses are small start-ups with no track record of success. Most concepts, products and ideas are in their infancy. And that makes the chances of success difficult to assess.
If you’re looking for an investment with a little less risk, take a look at these small cap ETFs to consider in 2021.
Investing in these ETFs can help you gain exposure to the penny equity sector with less risk. These funds are for investors who are not afraid of volatility. With the high risk comes the potential for high reward. Some of today’s penny stocks could be the market leaders for next year.
But remember, you should always do your own research before investing. Penny stocks are more volatile due to their nature and investors should be aware of the risks.
If you’re interested in penny stocks but don’t know where to start, find out how to invest in penny stocks.
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