TheStreet

) -- Micro-cap stocks have taken investors on a rough ride. In 2008, the Morgan Stanley Capital International U.S. Micro Cap Index dropped 44%, lagging the S&P 500 Index by 6 percentage points. The index has recovered this year, rising 38% and outpacing the S&P 500 by more than 25 percentage points.

The recent performance highlighted the appeal of these stocks, the smallest of the market. Although they can be extremely volatile, micro caps have outperformed the S&P 500 over long periods. During the 35 years ending in June, micro caps returned 14% annually, while large stocks returned 9.6%, according to Merrill Lynch, a unit of Bank of America.

Micro-cap stocks can help diversify portfolios because they don't always move in lockstep with the S&P 500. Adding a

mutual fund

that owns a mix of small and large stocks might help smooth out long-term results.