Small-Cap Funds Living Large

4/20/2015


This year's sluggish returns for large-cap stocks have some investors thinking small.

Through April 14, the average small-cap growth mutual fund had returned 7.1% — tops among all categories of diversified U.S. stock funds. Small-cap blend funds, up 4.4%, have also shined. For comparison, large-cap blend funds are up 2.5%.

Why have small-caps pulled ahead? Some investors worry about large-caps because the strong U.S. dollar has weighed on sales and earnings growth, particularly at the big multinationals that dominate large-cap funds. In contrast, small-caps tend to rely less on overseas sales — and stand to benefit from a U.S. economy growing faster than many foreign economies.

Small stocks have also benefited from heightened investor interest in companies with profit momentum. Excluding the beaten-down energy sector, per-share earnings for stocks in the S&P SmallCap 600 Index are projected to increase an average of 8.9% in 2015, versus 6.5% for S&P 500 stocks.

To be sure, small stocks are more volatile than large stocks. And small-caps are not cheap. The average S&P 600 stock trades at 24 times trailing earnings, versus 21 for S&P 500 stocks.

9 TOP SMALL-CAP FUNDS
Homestead Small Company Stock ($41; HSCSX) and T. Rowe Price Diversified Small-Cap Growth ($28; PRDSX) are in our recommended mutual-fund portfolios.
---- Annualized Return ----
Fund (Price; Ticker)
Fund
Rating
1
Year
(%)
3
Years
(%)
5
Years
(%)
Expense
Ratio
(%)
Turnover
Ratio
(%)
Growth
Guggenheim S&P 600 ETF
($90; RZG)
96
18.8
19.2
16.6
0.35
78
T. Rowe Price Divers. Sm.-Cap
($28; PRDSX)
99
23.1
20.7
18.0
0.85
17
Vanguard Small Cap Growth
($38; VISGX)
90
15.5
18.1
14.9
0.23
26
Blend
Homestead Small Co. Stock
($41; HSCSX)
97
13.0
19.4
16.3
0.89
3
Vanguard Small-Cap ETF
($124; VB)
99
15.4
19.3
14.6
0.09
10
Vanguard Strat. Small-Cap
($32; VSTCX)
100
16.9
21.3
16.4
0.38
64
Value
Vanguard Small Cap Value
($26; VISVX)
99
14.9
19.9
13.6
0.23
12
Vanguard Small-Cap Value ETF
($111; VBR)
100
15.1
20.1
13.8
0.09
12
Wasatch Small Cap Value
($6; WMCVX)
93
11.8
19.9
14.6
1.20
50

Still, looking for opportunities among small-cap funds makes sense. Our proprietary system ranks 407 small-cap funds. The nine listed above, including the two recommended picks profiled below, have these favorable attributes:

• Scores above 90, or among the top 10%, in our rating system. Ranks reflect total returns for periods up to five years, expense ratios, and risk-adjusted performance.

• Performance that outstripped their peer group over the last three and five years.

• Expense ratios below their category average.

• Modest portfolio turnover ratios, which measure trading activity. Funds that limit trading tend to have lower commission costs and greater tax-efficiency.

Homestead Small Company Stock ($41; HSCSX), which invests in growth and value stocks, has a  five-year annualized return of 16.3%, ranking it among the top 4% of its peer group. The fund held 59 companies on Feb. 28, with industrials representing 27% of the portfolio.


T. Rowe Price Diversified Small Cap Growth ($28; PRDSX) ranks among the top 9% of its peer group for one-, three-, five-, and 10-year total returns. The fund score is an outstanding 99.

OUR RECOMMENDED MUTUAL FUNDS
Year-To-Date *
--- % Of Portfolio ---
 
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Fund
Rating †
Artisan International ($32; ARTIX)
6.3
E
9
9
91
Baird Core Plus Bond ($12; BCOSX)
2.1
B
9
4
97
Dreyfus Midcap Index ($40; PESPX)
5.7
B
0
0
65
Dreyfus Small Cap Stock Index
($30; DISSX)
4.4
C
0
0
88
Homestead Small Company
($41; HSCSX)
3.9
D
5
6
97
iShares MSCI EAFE Small-Cap ETF
($51; SCZ)
10.2
C
4
6
83
T. Rowe Price Divers. Small-Cap Growth
($28; PRDSX)
9.2
A
7
7
99
T. Rowe Price Value
($36; TRVLX)
2.7
B
10
11
88
Thompson Bond ($12; THOPX)
1.7
A
9
4
59
Vanguard 500 Index ($193; VFINX)
2.3
C
7
8
84
Vanguard Dividend Growth
($23; VDIGX)
2.1
D
10
10
72
Vanguard GNMA ($11; VFIIX)
1.5
B
0
0
88
Vanguard Growth Index
($56; VIGRX)
4.6
C
10
11
90
Vanguard High-Yield Corp. ($6; VWEHX)
2.7
D
5
6
97
Vanguard Inter.-Term Tax-Exempt
($14; VWITX)
0.9
C
0
0
90
Vanguard Selected Value
($29; VASVX)
3.1
D
5
8
75
Vanguard Short-Term Invest.-Grade
($11; VFSTX)
1.3
B
0
0
97
Vanguard Total Bond Mkt. Index
($11; VBMFX)
2.0
C
0
0
60
Vanguard Wellesley Income
($26; VWINX)
2.1
D
0
0
98
Vanguard Wellington ($40; VWELX)
2.2
E
10
10
95

* Year-to-date ranks through April 14 from Morningstar, comparing performance among funds with same objectives. A = top 20%; B = next 20%; C= middle 20%; D = next 20%;
E = bottom 20%.   Fund ratings are percentile ranks based on our fund-rating system.


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