Penny stock ETFs can be a great avenue for diversifying your portfolio. Penny stocks are hated and loved by investors throughout the board. Nevertheless, there is no denial of their potential in the crypto space.
Keep in mind that many of the largest companies presently were once penny stocks. At one point, Amazon and Apple were penny stocks. Along with that, it is often more convenient for a small entity to grow in comparison to larger companies. The microcap industry has historically outperformed the overall market.
You can score big potentially if you enter early and hold long term. However, you should know about the increased risks associated with these funds. But before we get into talking about the best penny stock ETFs, let us dive into the basics of penny stocks ETFs.
What Are Penny Stock ETFs?
An ETF (Exchange Traded Fund) is a collection of securities that are traded on an exchange. It can be a pool of stocks, bonds, or commodities. These funds can offer investors exposure to several markets and help in minimizing tasks. They can also widen your portfolio without requiring you to spend a lot of effort and time on individual investments.
You can invest in various penny stocks at once by making investments in a microcap ETF. The stocks that have been stated below are the common shares of companies that trade at low values. These can be considered as an alternative to making investments directly in penny stocks.
Penny Stock ETFs To Consider
Now that you have an idea about what penny stock ETFs are, let us now have a look at the top 3 penny stock ETFs list that you can consider if you want to invest.
1. iShares Micro-Cap ETF
The iShares Microcap fund is the biggest ETF in its class. This fund is created mostly of individual penny stock funds. It trails the performance of the Russell Microcap Index. As of November 30, this fund has approximately 1,800 holdings.
The fund is notable as it has holdings in various sectors of the market. Its primary holdings are in the financials, healthcare, and industrials industry. Each of those sector weightings arrives at 22%, 23%, and 12%, respectively.
2. First Trust Dow Jones Select MicroCap ETF
The First Trust Dow Jones Select Microcap Index Fund is the second biggest microcap index exchange traded fund. This fund trails the performance of the Dow Jones Select MicroCap Index.
Shares in this index are screened depending on trading volume, market cap, and other financial indicators. The fund is primarily made up of the industrial, financial, and consumer discretionary sectors. Those sector weightings arrive at 15%, 35%, and 12% respectively.
There are more than 200 holdings in the fund. The largest holding of the fund is AdvanSix (NYSE: ASIX). As of March this year, the fund has more than $168 million in total net assets.
3. AdvisorShares Dorsey Wright Micro-Cap ETF
This is the last penny stock to buy on our list. The Advisor Shares Dorsey Wright Micro-Cap Fund is a vigorously managed portfolio of microcap stocks. This fund is comparatively new. But since the beginning of 2018, the fund has become quite popular in the microcap ETF market.
This fund presently has nearly 165 holdings. It is made up primarily of holdings in the consumer cyclical, technology, and industrial sectors.
This fund has an expense ratio of 1.27 percent. The high expense ratio is because of the active management of the fund. Most microcap ETFs apathetically invest in stocks in their benchmark index. This fund has a portfolio manager that screens microcap stocks systematically to involve top-ranked stocks.
Risks Of Investing In Penny Stock ETFs
Investing in penny stock ETFs needs a higher degree of risk tolerance in comparison to the average investor. These funds are not for the risk-averse.
Microcaps and penny stocks are thought to be risky investments for various reasons. Many of these ETF stocks are listed over the counter. Along with that, because they are not listed on a big exchange, they do not have to meet the same rules formulated to safeguard investors.
These stocks also arrive with a level of anonymity. Fewer gurus and financial analysts follow small stocks in comparison to their larger counterparts. And many of these entities are small startup businesses with no history of success. Most ideas, products, and concepts are in the infant stage. Thus, it is hard to anticipate whether they will succeed.
Nevertheless, if you are searching for an investment with a little less risk, look out for these small cap ETFs to consider in 2022.
Investing in these penny stock ETFs and penny stock mutual funds can help you to get exposure to the penny stock industry with less risk. These funds are for investors who are not afraid of fluctuations. With high risk arrives the potential for high reward. Some of the penny stocks of today could be next year’s market giants. However, note that before making any kind of investment you should always do your own research. Penny stocks are more fluctuating because of their nature and investors should be aware of the risks that are associated with them.