Small Business Sentiment Best in 35 Years: 5 Fund Picks

Last week, the National Federation of Independent Business (NFIB) released data for its small-cap business optimism index, which rose to its best settlement in February since 1983. Small-business sentiment also hit its second-highest level since its inception 45 years ago. The Trump administration’s tax cut policies and a strengthening domestic economy 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, recent trade war uncertainty makes these largely domestically focused funds a strong investment option. Also, small-cap funds will show greater growth potential following strong business optimism.

Small Business Sentiment Index Hovers Near Record High

The NFIB small-business optimism index increased 0.7 points to 107.6 in February. Out of the 10 major components in the index, seven registered a rise. Further, the three key components of the index, higher sales prospects, improving economy and strong inventory rose 3%, 2% and 2%, respectively. Inventory investment was best since 2000, while earnings trends were the strongest since 1987. Also, capital outlays were the biggest since 2004.

NFIB President Juanita Duggan said that “the historically high readings” highlighted that Trump’s new steel and aluminum tariffs and lower taxes will play a “transformative” role for small businesses. Additionally, NFIB Chief Economist Bill Dunkelberg said small-business are thriving in ways that have not been witnessed in more than “a decade.”

Trump’s Economic Policies in Focus

After weeks of market jitters, Trump finally signed the tariff plan into law on Mar 8, slapping tariffs of 25% on steel imports and 10% on aluminum imports from other countries. It will come into effect within 15 days. However, Canada and Mexico were exempted from these new U.S. tariffs. (Read More)

Moreover, Trump’s protectionist stance raised concerns over a possible retaliation by other countries with similar kind of moves. Investors have been concerned about prospects of a trade war. Fears of this nature could actually benefit small-cap companies, which have limited exposure to the global market compared to their mid- and large-cap equivalents.

Additionally, last year, the much awaited Tax Bill was finally signed by President Trump. Known as the Tax Cuts and Jobs Act of 2017, the reform permanently slashes corporate tax rates from 35% to 21%. Only last week, the President while talking to the U.S. Representative for Texas, Kevin Brady, raised expectations of “additional tax cuts” as he said that he wishes for a “phase two” in tax cuts.

Before the tax cut, companies on the small-cap index Russell 2000 had to pay a median effective tax rate of 31.9% while the larger, multi-national companies on the S&P 500 pay a median effective tax rate of 28%, according to Thomson Reuters data. This is why Trump’s Tax Cuts and Jobs Act of 2017 is expected to benefit those funds that have strong exposure to small-cap companies.

Buy These 5 Small-Cap Mutual Funds

Given this backdrop, it makes sense to bet on funds that invest in small-cap companies included on the Russell 2000 index. Notably, this prominent small-cap index has gained 13.5% in the past year. In the current scenario, investing in small-cap mutual funds with stable growth potential could be wise.

In this context, we have highlighted five 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.

Schwab Small-Cap Equity SWSCX seeks capital appreciation over the long term. SWSCX invests a large chunk of its assets in equity securities of small-cap companies that fall within the range of the Russell 2000 Index. The fund maintains a portfolio which aims to provide better returns than the Russell 2000 Index in the long run.

SWSCX has one-year annualized trailing returns of 8.73%, better than its category average’s return of 8.55%. Also, this fund has an expense ratio of 1.10% compared with the category average of 1.18%.

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.

The fund has one-year annualized trailing returns of 22.82%, better than its category average’s return of 17.92%. HIASX also has an expense ratio of 0.75% compared with the category average of 1.26%.

Northern Small Cap Core Fund NSGRX seeks appreciation of capital over the long haul. NSGRX invests a huge portion of its assets in common stocks of small-cap companies. Basically, small-cap companies are those with market cap in the range of the Russell 2000 index. 

NSGRX has one-year annualized trailing returns of 9.23%, better than its category average’s return of 8.55%. Also, this fund has an expense ratio of 0.65% compared with the category average of 1.18%.

MassMutual Select Small Cap Growth Equity Fund MSGSX invests a bulk of its assets in equity securities of companies, whose market-cap is similar to those included on 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.

The fund has one-year annualized trailing returns of 20.27%, better than its category average’s return of 17.92%. MSGSX also has an expense ratio of 0.96% compared with the category average of 1.26%.

Federated MDT Small Cap Core A QASCX seeks capital growth for the long run by investing heavily in the common stocks of domestic small-cap companies. The fund advisor focuses on investing in those small-cap companies that are listed on the Russell 2000.

QASCX has one-year annualized trailing returns of 11.58%, better than its category average’s return of 8.55%. Also, this fund has an expense ratio of 1.14% compared with the category average of 1.18%.

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 >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Get Your Free (SWSCX): Fund Analysis Report
 
Get Your Free (MSGSX): Fund Analysis Report
 
Get Your Free (QASCX): Fund Analysis Report
 
Get Your Free (HIASX): Fund Analysis Report
 
Get Your Free (NSGRX): Fund Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research