Small Business Sentiment Best in Over 34 Years: 4 Fund Picks

On Jun 12, the National Federation of Independent Business (NFIB) released data for its small-cap business optimism index, which rose to its highest level in May since 1983. The key metric also touched its second-best settlement since its inception 45 years ago. Strong domestic economy and the Trump government’s tax codes supported these gains.

Small-cap funds are believed to have a higher level of volatility compared to their large and mid-cap counterparts but provide comparatively better returns. Moreover, the recent trade war-related uncertainty makes these domestically focused funds a strong investment option. Also, small-cap funds will show greater growth potential following strong business optimism.

Small Business Sentiment Index Near Record High

The NFIB small-business optimism index increased 3 points to 107.8 in May. Out of the 10 major components in the index, eight registered an increase, while one was unchanged.

Three key components of the index including higher sales prospects, a better economy and strong expansion plans rose 10%, 7% and 7%, respectively. Sales trends reached the best level since 1995, while expansion plans settled at a 45-year high.

Moreover, employee compensation touched its highest settlement in 45 years, which in turn is projected to boost the labor participation rate in small-cap businesses. Additionally, earnings trends also rose 3%, touching its best levels since 1973.

Trump’s Tariffs and Tax Cuts Help Small Caps

Trump’s Tax Cuts and Jobs Act of 2017, permanently slashed corporate tax rates from 35% to 21%, which is a tailwind for small caps. In fact, NFIB President Juanita Duggan said, “main Street optimism is on a stratospheric trajectory” following recent regulatory changes and tax cuts. He added that easing regulations and lower taxes, along with a surge in “earnings and employee compensation,” will act as the key drivers to boost small businesses.

On Jun 15, President Trump said that tariffs of 25% will be levied on "industrially significant technologies." While announcing this $50 billion worth of tariffs on Chinese imports, Trump added that in case China retaliates in a similar fashion, the United States "will pursue additional tariffs."

Additionally on May 31, President Trump slapped tariffs of 25% on steel imports and 10% on aluminum imports from allies Canada and Mexico as well as from the member countries of the European Union. It came into effect on Jun 1. This in turn is expected to create turbulence for large companies with multinational operations.

Buy These 4 Small-Cap Mutual Funds

Given this backdrop, it makes sense to bet on funds that invest in small-cap companies. In this context, we have highlighted four small-cap mutual funds that have a Zacks Mutual Fund Rank #1 (Strong Buy) and have impressive 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.

Hartford Small Company HLS Fund IA HIASX primarily invests its assets in common stocks issued by small-cap companies. The fund may also invest almost one-fifth of its assets in securities of non-U.S. issuers. Small capitalization companies are those whose market capitalization falls within the collective range of the Russell 2000 and S&P SmallCap 600 indices.

HIASX carries an expense ratio of 0.78% compared with the category average of 1.25%. Moreover, HIASX requires a minimal initial investment of $0. The fund has one-year annualized returns of 28.8%.

HIASX has a Zacks Mutual Fund Rank #1. Further, Steven C. Angeli is one of the fund managers of HIASX since 2000.

MassMutual Select Small Cap Growth Equity Fund MSGSX 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. 

MSGSX carries an expense ratio of 0.96% compared with the category average of 1.25%. Moreover, MSGSX requires a minimal initial investment of $0. The fund has one-year annualized returns of 26.7%.

MSGSX has a Zacks Mutual Fund Rank #1. Further, Kenneth L. Abrams is one of the fund managers of MSGSX since 2001.

Principal SmallCap S&P 600 Index J PSSJX invests a huge part of its assets in equity securities of companies from the S&P SmallCap 600 Index. According to the index, small-cap companies are those whose market-cap ranges between $51.6 million and $4.5 billion.

PSSJX carries an expense ratio of 0.46% compared with the category average of 1.19%. Moreover, PSSJX requires a minimal initial investment of $1,000. The fund has one-year annualized returns of 22.1%.

PSSJX has a Zacks Mutual Fund Rank #1. Further, Thomas L. Kruchten is one of the fund managers of PSSJX since 2011.

Vanguard Strategic Small-Cap Equity Investor VSTCX invests a bulk of its assets in securities of domestic small-cap companies that are expected to be undervalued and have strong growth prospects. VSTCX seeks to maintain a risk profile similar to the MSCI US Small Cap 1750 Index.

VSTCX carries an expense ratio of 0.29% compared with the category average of 1.19%. Moreover, VSTCX requires a minimal initial investment of $3,000. The fund has one-year annualized returns of 17.9%.

VSTCX has a Zacks Mutual Fund Rank #2. Further, James P. Stetler is one of the fund managers of VSTCX since 2006.

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