In November, the small-cap business optimism index rose to its second-highest level since its inception 44 years ago. Small-business sentiment also hit its best settlement since 1983. Expectations of better business conditions in the near future and expansion in the business environment supported these gains. Out of the 10 key components of the index, eight registered an increase.
Additionally, optimism over Trump’s tax overhaul policies makes small-cap growth funds a favorable investment choice. Though small-cap funds are believed to have a higher level of volatility compared to their large and mid-cap counterparts, they show greater growth potential following strong business optimism and a weak tax environment.
According to National Federation of Independent Business, the small-business optimism index increased 3.7 points to settle at 107.5 in November, its second-best level in 44 years. Out of the 10 major components in the index, only plans to make capital outlays and current job openings in small-cap companies decreased last month.
Meanwhile, the two key contributors of the index, expectation of improving economy and higher real sales prospect rose 16% and 13%, respectively. Additionally, better employment plans and an expanding business environment for small business firms soared 14% and 10%, respectively.
Per the index readings, majority of the NFIB members now expect the U.S. economy to register strong growth in the fourth quarter, which may rise as high as 4%. NFIB President Juanita Duggan said small business owners are now focused on Trump’s long-awaited tax reforms. Duggan added that 2018 might shape up as a great year for small business firms, provided the President and the Congress “follow through on tax reform.”
On Dec 2, U.S. Senate Republicans passed the tax Bill after they won the vote by 51 to 49. According to the Tax Cuts and Jobs Act, the corporate tax rate will be reduced to 20% from 35%, while companies will be allowed to pay a 5% tax on reinvested earnings and 10% tax on deferred cash earnings.
With Trump’s much-awaited Republican tax Bill being approved by the Senate, a tax cut seems evident in the coming months. Lower tax rate prospects are expected to have a positive impact on funds, which have significant exposure to small-cap stocks.
In the current scenario, investing in small-cap mutual funds with stable growth potential could be wise. The small-cap growth, value and blend mutual funds posted year-to-date (YTD) returns of 19.8%, 7.4% and 11.1%, respectively.
In this context, we have highlighted five small-cap mutual funds that have a Zacks Mutual Fund Rank #1 (Strong Buy) and have impressive YTD and one-year annualized returns. Moreover, these funds have a low expense ratio and their minimum initial investment is within $5000.
We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.
TCM Small Cap Growth Fund (MUTF:TCMSX) invests a large share of its assets in companies, which are expected to have market capitalization similar to those listed on the Russell 2000 Index. TCMSX seeks growth of capital over the long term.
TCMSX has YTD and one-year annualized returns of 22.6% and 21.9%, respectively, and an expense ratio of 0.95% compared with the category average of 1.32%.
Bridgeway Small-Cap Value Fund (MUTF:BRSVX) maintains a diversified portfolio by investing in securities of small-cap companies listed on the NYSE, NYSE MKT, and NASDAQ. BRSVX seeks total returns through growth of capital. The fund invests the lion’s share of its assets in undervalued small-cap stocks.
BRSVX has YTD and one-year annualized returns of 6.4% and 5.5%, respectively, and an expense ratio of 0.94% compared with the category average of 1.31%.
JPMorgan Small Cap Growth Fund (MUTF:PGSGX) invests a huge part of its assets in securities of small-cap companies. These companies have market cap similar to those on the Russell 2000 Growth Index. PGSGX seeks long-term capital growth primarily from a portfolio of equity securities of small-capitalization and emerging growth companies.
PGSGX has YTD and one-year annualized returns of 37.7% and 35.1%, respectively, and an expense ratio of 1.24% compared with the category average of 1.32%.
T. Rowe Price Small-Cap Value Advisor Fund (MUTF:PASVX) seeks capital appreciation over the long run. PASVX invests the lion’s share of its assets in securities of companies with market capitalization similar to those listed on the Russell 2000 Index. Also, it may consider securities of non-U.S. companies for potential investment.
PASVX has YTD and one-year annualized returns of 12.3% and 11.6%, respectively, and an expense ratio of 1.15% compared with the category average of 1.22%.
Principal SmallCap S&P 600 Index Fund (MUTF:PSSMX) invests a huge part of its assets in equity securities of those small-cap companies that are included on the S&P SmallCap 600 Index. PSSMX seeks appreciation of capital for the long run.
PSSMX has YTD and one-year annualized returns of 11.3% and 9.9%, respectively, and an expense ratio of 0.73% compared with the category average of 1.22%.
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