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Mutual Fund Commentary

Following a month-long uncertainty over U.S. Presidential election results, markets registered strong gains last week following Donald Trump’s surprise victory. Following this development, the Russell 2000 Small-Cap Index emerged as the top performer among the key benchmarks in the last one-month timeframe. While the Dow, the S&P 500 and the Nasdaq gained 4.3%, 1.8% and 0.4%, respectively, in the Oct 17 to Nov 11 period, the Russell 2000 increased 7.3%.

Moreover, last week the Dow posted the best weekly gain of 5.6% since 2011. Like the blue-chip index, the Russell 2000 registered its best increase since December 2011 with a more than 10% jump, indicating strong growth for small cap funds. Both small-cap growth and value funds registered better one-month returns than their large- and mid-cap counterparts.

Small-cap value mutual funds posted a return of 7.5% in the last one month, while the large- and mid-cap value funds registered gains of 3.8% and 4.5%, respectively. Also, small-cap growth mutual funds posted a return of 4.2% in last one month, while mid-cap growth funds registered gains of only 1.5% and large-cap growth funds incurred a loss of 0.7%. In the current scenario, investing in small-cap mutual funds could be a wise option.

What Drove the Small-Cap Index Higher?

Domestic Economy in Focus

In his victory speech, Trump said that the current economic growth pace of 2% will be doubled and almost 25 million jobs will be created in the coming 10 years. Moreover, he aims to make the U.S. economy the strongest in the world. He also said that he will not only boost military spending but will also revive the domestic manufacturing sector.

Loosing financial regulations and homeward-looking policies are likely to boost the growth pace of the domestic economy. After the 2008 financial crisis, the banking sector faced revenue pressure following stringent regulatory measures. However, it is expected that Trump will get “rid of Dodd-Frank” regulations. A few months ago, Trump had said, “Dodd-Frank has made it impossible for bankers to function,” and that needs to be repelled. This in turn will help boost the net profit margin of banks.

Higher Infrastructure Spending

Trump is expected to increase public spending on infrastructure by a trillion of dollars over the next 10 years. Moreover, he proposed to offer $137 billion in tax credits to private construction companies undertaking infrastructure projects. Trump’s spending proposals might have a positive impact on the overall industrials industry.

Investors are now expecting Trump’s policies to result in strong growth for the U.S. economy and eventually prompt the Fed to raise interest rates. Rising rate hike chances led the dollar to increase 2.4% for the week, against a basket of 16 major currencies, registering its best weekly percentage rise since May 2015.

Buy These 6 Small-Cap Mutual Funds

The Russell 2000 Index gained following Trump’s economic proposals of looser financial regulations and higher fiscal spending. Moreover, small cap funds are favorable investment choices as they have lesser international exposure and are thus protected from the adversities of a rising dollar. 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 when markets see an uptrend. Hence, risk-loving investors can pick these funds to gain following the recent gains in the Russell 2000.

In this scenario, we highlight two mutual funds from each of the three small-cap categories – growth, blend and value – that either have a Zacks Mutual Fund Rank #1 (Strong Buy). These funds also have impressive one-month and three-month returns. Also, 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.

Small-Cap Growth

Fidelity Small Cap Growth (FCPGX - Free Report) invests a major portion of its assets in equity securities of small-cap companies. The fund invests both in domestic and foreign companies, which are expected to have an above-average growth prospect. FCPGX has 1-month and 3-month returns of 1.4% and 0.6%, respectively. It has an expense ratio of 1.11% as compared to the category average of 1.37%.

TCM Small Cap Growth (TCMSX - Free Report) invests a large share of its assets in companies having market capitalizations similar to those listed in the Russell 2000 Index. TCMSX has 1-month and 3-month returns of 4.8% and 4.6%, respectively. It has an expense ratio of 0.93% as compared to the category average of 1.37%.

Small-Cap Blend

Principal SmallCap S&P 600 Index R3 (PSSMX - Free Report) invests the majority of its assets in firms listed in the Standard & Poor's SmallCap 600 Index. PSSMX also invests in index futures and equity ETFs in order to reduce tracking error by gaining exposure to the index. Both its 1-month and 3-month returns were 5.1%. The fund has an expense ratio of 0.73% as compared to the category average of 1.25%.

Federated MDT Small Cap Core Fund Class A Shares(QASCX - Free Report) invests the majority of its assets in stocks of small-cap companies. QASCX invests mostly in companies listed in the Russell 2000 Index. The fund has 1-month and 3-month returns of 4.9% and 7.4%, respectively. It has an expense ratio of 1.13% as compared to the category average of 1.25%.

Small-Cap Value

JPMorgan Small Cap Value A (PSOAX - Free Report) uses the value-based strategy to invest in equity securities of small cap firms having market capitalization similar to those included in the Russell 2000 Value Index. The fund has 1-month and 3-month returns of 6.1% and 5.7%, respectively. It has an expense ratio of 1.25% as compared to the category average of 1.34%.

CRM Small Cap Value Investor (CRMSX - Free Report) invests in securities of small-cap companies having market capitalization similar to those listed in the Russell 2000 Value Index. CRMSX has 1-month and 3-month returns of 6.5% and 6.1%, respectively. It has an expense ratio of 1.12% as compared to the category average of 1.25%.

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