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4 Small-Cap Growth Mutual Funds to Bloom on Improving US Economy

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The U.S. economy posted its weakest quarterly growth in two years between January and March. However, things have been looking much better since April. Last month, the battered U.S. factory sector showed signs of acceleration, sales at retailers touched the highest level in more than a year and most of the housing indicators continue to experience steady growth.

These factors prompted the Atlanta Fed to increase its Q2 GDP forecast. Moreover, an uptick in the leading economic index in April suggests a pickup in U.S. growth. Hence, investing in small-cap growth mutual funds will be a prudent choice. Small caps are mostly affected by domestic developments and are unfazed by the vagaries of a global economy.

Factory Output Revs Up

Industrial production in the U.S. advanced 0.7% in April, the highest climb for a single month since Nov 2014, according to the Board of Governors of the Federal Reserve System. Utilities and factory output led the advance. Output at utilities soared almost 6% in April, driven by higher demand for electricity and natural gas. Factory output also went up 0.3% last month. Demand for big-ticket items including machinery and cars picked up in April, which eventually boosted this biggest component of overall production.

The ISM manufacturing index, on the other hand, slipped a bit in April, but still continued to expand. According to Supply Management, the index of manufacturing activity came in at 50.8 in April, while in March the reading was 51.8. A reading above 50 indicates expansion. Besides, 15 of the 18 manufacturing sectors have reported growth last month, the most since Feb 2013.

Retail Sales Post Biggest Gain in a Year

Sales at retailers jumped 1.3% in April from a month earlier, the biggest gain since Mar 2015, according to the Commerce Department. Gains were robust, with auto dealers, gas stations and Internet retailers left grinning. Purchases at auto dealers advanced 3.2% in April, while gas stations posted a 2.2% increase in sales. Internet and mail-order sales also leaped 2.1% last month. Internet and catalog sales had surged more than 10% last year as Americans showed an increasing inclination to shop online.

Further, improving household income will help sales at retail outlets to gain pace in the near future. Wage growth has already propelled U.S. retail sales in April, signalling that consumers could help revive economic growth in the current quarter. U.S. consumer confidence also soared to its strongest level in almost a year in May.

Housing Indicators Improve

A slew of recent reports indicate that the housing market has picked up momentum after a quiet first quarter. The U.S. Department of Commerce reported that housing starts increased 6.6% from March to an annual rate of 1,172,000 in April. Building permits also increased 3.6% from March to 1,116,000 last month.

New home sales rose by 16.6% from March to 619,000 in April, its highest level since Jan 2008, according to the U.S. Department of Housing and Urban Development. Existing homes sales also gained 1.7% last month to a seasonally adjusted annual rate of 5.45 million, according to National Association of Realtors. 

The National Association of Home Builders too reported that home builder sentiment index remained flat at 58 in May for the fourth successive month. This also indicates that the sector continues to experience steady growth, fueled by an improving job market and low mortgage rates.

Invest in Small-Cap Growth Mutual Funds? 4 Choices

In the light of the above discussion, it’s clear that the U.S. economy gathered steam in April, with manufacturing to retail to housing sectors all showing signs of improvement. Thanks to these positive developments, the Atlanta Federal Reserve’s Q2 GDP forecast climbed to 2.8% from an earlier projection of 2.2%. The Conference Board’s leading economic index also went up 0.6% to 123.9 in April following a flat reading in March.

Given the broad-based signs of health, it will be judicious to invest in growth mutual funds. Further, if these funds focus on small-cap stocks, it’s all the more better, since such companies are closely tied to the domestic front and have less international exposure.

We have selected four small-cap growth mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy), offer minimum initial investment within $5000, have no front or deferred load and carry a low expense ratio. These funds also have positive 3-year and 5-year annualized returns.

Turner Small Cap Growth invests a major portion of its assets in equity securities of U.S. companies with small market capitalization that have strong earnings growth potential.

TSCEX’s 3-year and 5-year annualized returns are 2.8% and 4.2%, respectively. Annual expense ratio of 1.25% is lower than the category average of 1.3%.

TCM Small Cap Growth (TCMSX - Free Report) invests a large portion of its assets in stocks of small capitalization companies.

TCMSX’s 3-year and 5-year annualized returns are 8.9% and 8.5%, respectively. Annual expense ratio of 0.93% is lower than the category average of 1.3%.

Dreyfus/The Boston Company Small Cap Growth I (SSETX - Free Report) invests the majority of its assets in equity securities of small-cap U.S. companies. Such companies have market cap equal to or less than the market cap of the largest company included in the Russell 2000 Growth Index.

SSETX’s 3-year and 5-year annualized returns are 5.9% and 7.6%, respectively. Annual expense ratio of 0.95% is lower than the category average of 1.3%.

Putnam Small Cap Growth Y (PSYGX - Free Report) invests mainly in common stocks of small U.S. companies, with a focus on growth stocks. PSYGX invests in companies of a size similar to those listed in the Russell 2000 Growth Index.

PSYGX’s 3-year and 5-year annualized returns are 5.2% and 6.9%, respectively. Annual expense ratio of 0.96% is lower than the category average of 1.3%.

About Zacks Mutual Fund Rank

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