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Size Doesn't Matter When It Comes to the Microcaps

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Investors looking for a new place to put money to work as markets churn are going small—really small.

The modestly populated group of exchange-traded funds that deals in microcaps—companies with market capitalizations between $50 million and $300 million—has surged in popularity recently.

On a percentage-gain basis, microcaps have led all classes of ETFs in 2013 and have retained that position even as money has flowed out of funds and back into cash during the recent market turmoil.

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Though microcap ETFs remain small comparatively, the group has pulled in $230 million this year, a 42.4 percent increase year-over-year, according to State Street.

Investment advisors generally steer clients away from small stocks because they can be volatile and offer lower returns on average than their larger, more stable counterparts. Microcaps, then, are usually viewed as a trade to take advantage of momentary price movements, rather than as a long-term investment.

But at a time when the huge first-half rally is looking tired, many investors are combing the markets looking for alternatives to broad plays.

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"It smells a bit speculative to me, and I think that's kind of what's driving it," said Brian Lazorishak, senior portfolio manager at Chase Investment Counsel. "People are looking for a little bit extra return."

The ETFs, then, allow investors easier access to the world of microcaps than stock picking.

For instance, the iShares Russell Microcap Index Fund itself has a market cap of about $600 million and has delivered strong returns—up 2.1 percent over the past month and 35 percent in the 12-month period.

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The Standard & Poor's 500 large caps have lost more than 1 percent in the one-month period and are up 23 percent year-over-year, while the Russell 2000 small-cap index is about flat for the 30-day period and up 30 percent for the 12 months.

But Lazorishak said that the larger stocks still offer better returns over time.

"In the mid-cap space relative to small, you get most of that excess return with less risk," he said. "That would be doubly so with microcaps. You might have some good return opportunities but with a much higher risk profile, with both individual stocks and looking at it as an asset class."

—By CNBC's Jeff Cox. Follow him @JeffCoxCNBCcom on Twitter.

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