Are micro-cap mutual funds indeed riskier?

Abstract

Purpose

This study aims to examine the cross-sectional variation in risk of US-based micro-cap open-end mutual funds. Micro-cap mutual funds allow investors to access very low-priced stocks issued by the smallest of companies. The stock of these firms is usually not traded in major exchanges, and their financial information is not readily available and, thus, regarded as risky investments.

Design/methodology/approach

The author examines the cross-sectional variation in risk and higher moments of US-based micro-cap mutual funds in comparison with that of small-cap and mid-cap mutual funds. Total, systematic and idiosyncratic risk metrics, along with higher moments, are estimated before, during and after the 2008 financial crisis.

Findings

The author finds that, indeed, based on total and idiosyncratic risk metrics, the sample of micro-cap funds is riskier than the size-matched samples of small-cap and mid-cap funds. The author also reports that the sample of micro-cap funds fail to generate higher excess returns than the less risky small-cap and mid-cap funds.

Originality/value

To the best of the author’s knowledge, this is the first time that the risk of small-cap mutual funds has been examined.

Citation

Rodriguez, J. (2015), "Are micro-cap mutual funds indeed riskier?", Review of Accounting and Finance, Vol. 14 No. 4, pp. 352-362. https://doi.org/10.1108/RAF-03-2015-0045