Why not simply invest in a Micro Cap Stock ETF

Penny Stocks
Suddenly it seems like everyone is talking about investing in Exchange-Traded Funds (ETF), even when it comes to penny stocks! The ETF trend has gained popularity with investors because of low expenses and a growing dissatisfaction with the dismal relative performance of active money managers. Although the ETF market has been growing in leaps and bounds for the last decade, one can imagine that lately the investor is looking at them simply because he or she feels they do not have to pay extra fees to an active manager to loose their money.
A little history on the micro cap stock ETF: Back in mid-2005, when the Russell Microcap Index was introduced, three micro cap stock ETF were created with the herd mentality that if there is an index then there should be an ETF that follows it. These were Barclays Global Investors iShares Russell Microcap Index Fund (IWC), PowerShares Zacks Microcap Portfolio (PZI) and First Trust Dow Jones Select Microcap Fund (FDM). While Barclays attempted to merely copy the Russell Microcap Index, the other two used some quantitative screens to enhance returns.
The most recent three year annualized return on these micro cap stock ETFs was -13 and -10%. Needless to mention, no investor who is looking to gain insight into the smaller cap stock engine that promotes innovation is looking for these paltry returns. Instead, most investors, and correctly so, are attracted to these young micro cap companies for their exponential growth potential and seek to capture double to triple digit gains.
Also, the difference in the returns of the three ETFs demonstrates that following the universe of micro cap stocks is not as easy as it might seem at first glance - there are liquidity issues and the sheer amount of micro cap stocks prevents pure mirroring. Among the three ETFs, there are no redundancies in the top ten holdings.
The best way to invest in micro cap or penny stocks is to subscribe to a reputable online newsletter that not only is familiar with them but also issues timely stock alerts to subscribers. One good example of such a site is www.hypergrowthstock.com If you are serious in uncovering penny stocks that will deliver tremendous growth potential, leave the ETFs to pension managers who pay lips service to the micro cap stocks as a passive asset class and listen to the professionals with a good track record specializing in getting into and out of smaller stocks.