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4 Small-Cap Growth Funds to Buy as Bull Market Turns 9

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The U.S. stock market celebrated its ninth bullish year on Mar 9. On the same day in 2009, the S&P 500 had lost more than 50% to hit a low of 676.53, while the Dow Jones Industrials (currently at 25,007.03) had closed at 6,547.

Over the years, the stock market has been growing by leaps and bounds. During this time, U.S. stocks overshadowed other investments like gold and real estate as well as their European counterparts. U.S. large-cap stocks have yielded a return of around 325% since Mar 9, 2009. This means that an investment of $100,000 in a fund tracking large-cap stocks is now worth around $425,000.

Gold, in the meantime, has climbed only 43% from $925 per ounce in March 2009 to the current $1,325, per the World Gold Council. This implies that an investment of $100,000 made in gold back then is now worth $143,000.

Such favorable circumstances call for investing in small-cap growth mutual funds which focus largely on U.S.-based investments.

Factors Supporting the Bull Run

The selloff on Mar 9, 2009 prompted a comment from then President Barack Obama — “what you’re now seeing is profit-and-earnings ratios are starting to get to the point where buying stocks is a potentially good deal if you've got a long-term perspective on it.”

Interestingly, the Dow has more than tripled, marking the second-longest and second-highest Bull Run in history. The Dow also crossed the coveted 20,000 mark in late January and then breezed past the 21,000 threshold just a month later. The bull market has helped the blue-chip index scale a whopping 14,300 points.

Right after President Trump’s win, the U.S. economy saw a solid start to 2017. The economy expanded at a seasonally adjusted annual rate of 2.3% last year, marking the best growth in two years. Also, Americans are getting fatter paychecks now, with wages growing at the quickest pace since the end of the last decade.

The new tax laws give companies a massive tax break as they will be paying between 8% and 15.5% instead of the earlier 35% to bring back money from overseas. This in turn can be used to create jobs and reward shareholders — something the Trump administration has been aiming at since the election campaigns.

A healthier global economy, in turn, lifted corporate profits. In fact, for 2017, total S&P 500 index earnings are expected to be up 7.1% on 5.9% higher revenues, way higher than the 0.7% earnings growth on 2.2% rise in revenues recorded in 2016.

Why Small-Cap Growth Mutual Funds?

Small-cap growth funds are preferred by investors with a high risk appetite when capital appreciation over the long term takes precedence over dividend payouts. These funds focus on realizing an appreciable amount of capital growth by investing in stocks that are projected to rise over the long term.

Meanwhile, small-cap funds are good choices for investors seeking diversification across different sectors and companies. Small-cap funds generally invest in companies with market cap lower than $2 billion. The companies, smaller in size, offer growth potential and their market capitalization may increase subsequently. Also, due to their restricted international exposure, small-cap funds offer higher protection than their large- and mid-cap counterparts against any global downturn.

4 Hot Choices

Given such circumstances, we have highlighted four small-cap growth mutual funds that are poised to gain significantly from the bullish run of the market as it just turned nine. These funds also carry a Zacks Mutual Fund Rank #1 (Strong Buy). Moreover, these funds have encouraging three and one-year returns. Additionally, the minimum initial investment is within $5000.

We expect these funds to outperform 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.

The question here is why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without multiple commission charges that are associated with stock purchases are the primary reasons why investors should park their money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

Federated MDT Small Cap Growth A (QASGX - Free Report) seeks capital growth for the long run. QASGX invests mainly in the common stocks of domestic small-cap companies. The fund attains its investment strategy by investing in companies that are listed on the Russell 2000 Growth Index.

This Sector – Small Cap Growth product has a history of positive total returns for over 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 18.4% and 17.1%, respectively. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

QASGX has an annual expense ratio of 1.15%, which is below the category average of 1.27%.

Meridian Growth Legacy (MERDX - Free Report) invests primarily in small- and mid-cap companies, which are expected to provide above-average growth in earnings and revenues. The fund may also invest around one-fourth of its assets in foreign companies, including those involved in emerging markets.

This Sector – Small Cap Growth product has a history of positive total returns for over 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 10.1% and 11%, respectively. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

MERDX has an annual expense ratio of 0.87%, which is below the category average of 1.27%.

Hartford Small Company HLS (HDMBX - Free Report) seeks appreciation of capital. The fund invests in common stocks of companies that have strong capital growth potential. HDMBX’s sub-adviser, Wellington Management Company, LLP, invests the lion’s share of its assets in common stocks of companies that fall within the range of both the Russell 2000 and S&P SmallCap 600 Indices.

This Sector – Small Cap Growth product has a history of positive total returns for over 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 8.2% and 12.3%, respectively. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

HDMBX has an annual expense ratio of 1.01%, below the category average of 1.27%.

MassMutual Select Small Cap Growth Equity R5 (MSGSX - Free Report) invests a large chunk of its assets in equity securities of companies, whose market-cap is similar to those included in the S&P SmallCap 600 Index or the Russell 2000 Index. The fund may also invest around one-fifth of its assets in foreign companies, including those engaged in emerging markets.

This Sector – Small Cap Growth product has a history of positive total returns for over 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 11.6% and 14.8%, respectively. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

MSGSX has an annual expense ratio of 0.96%, compared with the category average of 1.27%.

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