Major U.S. indexes like the Dow, the S&P 500 and the tech-heavy Nasdaq have returned 14.3%, 22.5% and 22.4%, respectively, so far this year. Various favorable domestic macroeconomic data and the Federal Reserve’s interest rate cut decision have restored confidence and investors are expecting further downsizing before the end of the year.

The producer price index (PPI) for final demand remained unchanged month over month at 0.2% in September, in line with Wall Street expectations. Also, a resilient labor market, as indicated by a solid 254,000 growth in nonfarm payrolls, and the fall in the unemployment rate to 4.1%, suggest the Fed has been able to create a “soft landing” for the economy.

Further cooling of inflation and strength in the labor market should provide ample room for the Fed to act according to its plan of gradually bringing back the key interest rates to the 2.75-3% rangeby 2026. Such moves would ease the interest rate burden on American businesses and thereby improve profitability.

Small-cap value funds like Invesco Small Cap Value (VSMIX Quick QuoteVSMIX - Free Report) , PIMCO RAE US Small (PMJAX Quick QuotePMJAX - Free Report) and DFA US Small Cap Value (DFSVX Quick QuoteDFSVX - Free Report) are good choices for investors seeking diversification across different sectors and companies. These funds have the majority of their investments in sectors such as retail, technology, finance and industrial cyclical, which will help investors in long-term growth and wealth creation.

Why Invest in Small-Cap Value Mutual Funds?

Small-cap value mutual funds provide excellent choices for investors looking for bargains, i.e., stocks at a discount, with impressive growth potential. Small-cap funds are a good choice for investors with a high-risk appetite, as companies with small-market capitalizations are expected to have higher growth potential than large- and mid-cap companies. Small-cap funds generally invest in companies having a market cap of less than $2 billion. Also, small-cap funds are expected to provide diversification across different sectors and companies.

Value mutual funds are those that invest in stocks that are trading at discounts to book value, have low price-to-earnings ratio and have high dividend yields. Value investing is always a very popular strategy, and for good reason. After all, who doesn’t want to find stocks that have low PEs, solid outlooks, and decent dividends?

Mutual funds, in general, reduce transaction costs and diversify their portfolios without an array of commission charges that are mostly associated with stock purchases (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

We have, thus, selected three small-cap value mutual funds that have given impressive 3-year and 5-year annualized returns, boast a Zacks Mutual Fund Rank #1 (Strong Buy), offer a minimum initial investment within $5,000 and carry a low expense ratio of less than 1%.

Invesco Small Cap Value fund invests most of its assets along with borrowings, if any, in common stocks of small-capitalization companies and derivatives instruments with similar economic characteristics. VSMIX advisors choose to invest in companies that, according to them, are undervalued.

Jonathan Mueller has been the lead manager of VSMIX since June 24, 2010. Most of the fund’s exposure was in companies like Vertiv Holdings (3.2%), Coherent (3%) and Lumentum (3.0%) as of April 30, 2024.

VSMIX’s three-year and five-year annualized returns are 17.5% and 20.9%, respectively. VSMIX has an annual expense ratio of 0.86%.

To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

PIMCO RAE US Small fund invests most of its net assets in equity securities of small-cap companies that are economically tied to the United States. PMJAX advisors choose to invest in stocks based on certain liquidity and capacity requirements.

Robert D. Arnott has been the lead manager of PMJAX since April 15, 2015. Most of the fund’s investments were in companies like Abercrombie & Fitch (5.6%), Dillards (4.4%) and Warrior Met Coal (3.9%) as of June 30, 2024.

PMJAX has 3-year and 5-year annualized returns of 11.1% and 16.3%, respectively. PMJAX has an annual expense ratio of 0.90%

DFA US Small Cap Value fund invests most of its net assets in small-cap domestic companies. DFSVX advisors also invest in futures and options contracts of U.S. equity securities and indices to manage market risks.

Marc C. Leblond has been the lead manager of DFSVX since Feb. 28, 2020. Most of the fund’s investments are in companies like Amkor Technology (0.9%), Taylor Morrison Home (0.9%) and Mohawk Industries (0.7%) as of April 30, 2024.

DFSVX has three-year and five-year annualized returns of 10.4% and 14.4%, respectively. DFSVX has an annual expense ratio of 0.31%.

Want key mutual fund info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing mutual funds, each week. Get it free >>