Why Quality Management is so Important When Investing in Micro-Cap ETFs

What I want to focus on is when thinking about exposure for small cap or micro cap, there's this index idea: just own the market like we do with the S&P 500 or the Russell 1000, or are you going to screen away certain things? In my mind, there's one product that jumps out ahead of the others in this idea, and that is the First Trust Dow Jones Select Micro Cap, in that it has a number of quality screens that it does on this space of the market.

As a result, if you look through to the underlying of the portfolio, it's a much smaller number of holdings, but really what I look at is, over the last 12 months, are these companies making money? When you look at FDM, 81% of the companies inside the portfolio have positive net income over the past 12 months, whereas if you look at something like IWC, 46%—so over 50% of the companies in that portfolio lost money last year.

There's clearly, you know, you're buying speculative, it may jump in a market that's really beta driven, you might get more opportunity in IWC, but you are buying a lot of companies that are not going to be here in a few years. That's just the simple result of passive investing on that large of a universe of small micro cap names. AVSC is pretty good, it's at 73%, and it's got an interesting overlay. It owns a lot more securities than FDM does, but I think just purely in this space, and I'll get a little bit more into it as I go along, but I like the screening methodology of FDM in this particular area.

Just from a standpoint of owning a little bit more quality names within the small micro cap.