Royce Micro-Cap Trust Offers 7% Yield with 11% Discount, Outperforms Micro Caps Amid Falling Interest Rates

The Royce Micro-Cap Trust (RMT) offers a 7% yield and an 11% discount. With falling interest rates, micro cap stocks should perform well. RMT is a closed-end fund focused on micro cap stocks and is the oldest fund in its niche.

The Royce Micro-Cap Trust (RMT), a closed-end fund focused on micro-cap stocks, offers investors a compelling yield of 7% and an 11% discount to its net asset value (NAV) per share. This opportunity arises as interest rates are expected to fall, potentially benefiting micro-cap stocks. RMT, established in December 1993, is the oldest fund in its niche and has a long track record of performance.

As of September 30, 2025, micro-cap stocks have outperformed other market segments, registering a gain of ~54% compared to the S&P 500's 38% increase. RMT itself has seen an impressive 41% gain over the same period, demonstrating its resilience and potential. The fund invests in a diversified range of sectors, with industrials, technology, financials, and healthcare being the primary sectors. It primarily targets value stocks with market caps of less than $500 million.

RMT's top 10 holdings have seen significant changes since the end of 2024, with nLIGHT (LASR) being the sole holdover. The fund's largest sector exposure is now industrials at 27.8%, up from 22.4% at the end of 2024. Tech exposure has decreased to 21.5% from 23.9%, while financials remain stable at 16.3%. Healthcare exposure has fallen to 10.8% from 12.5%. The fund has a modest five-year dividend growth rate of 3.22%, with distributions paid quarterly.

Despite underperforming the Russell Microcap Index over the past quarter, year-to-date, and one-year periods, RMT has consistently outperformed it over longer periods, including three-, five-, 10-, 15-, 20-, and 25-year periods. It has also outperformed the Russell 2000 index in all periods since inception. However, RMT is not without risks. Volatility risk is inherent in micro-cap stocks due to their low liquidity, but RMT's management has demonstrated lower drawdowns in seven out of nine downturns of 15% or more from the index’s prior historical high since the fund's inception.

RMT's current discount to NAV per share of 11.86% is very similar to its historical average discounts, suggesting that buying the fund at this level could be a strategic move. However, the fund's performance is also influenced by interest rates. With rates expected to fall, micro-cap stocks should benefit, potentially driving RMT's performance further.

In conclusion, the Royce Micro-Cap Trust offers an attractive yield and discount, with falling interest rates potentially providing a tailwind for its performance. However, investors should remain aware of the volatility risks associated with micro-cap stocks and the fund's historical performance.