The Market's Sparrows Are Flying High

Microcap funds are hot--but be prepared for high risk

After a long period of lagging behind the market, small-company stocks roared to life this spring. But unbeknownst to many investors, shares issued by the tiniest companies rallied even more explosively. As a result, microcap funds--which specialize in companies valued at $300 million or less--rose 22% from April through June, leaving every other category of domestic equity fund in the dust, according to mutual-fund tracker Lipper. The microcaps even trounced the small-cap funds, which were up 15.6%. "Whenever we find ourselves in a small-cap market, the fantastic returns tend to be amplified as you move down in size," says Satya Pradhuman, director of small-stock research at Merrill Lynch.

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