Buy Top 5 Small-Cap Funds On Optimism Over Tax Reform

Following a recent rough patch, both the Dow and S&P 500 registered the second straight day of gains on Aug 22. The Dow rose 196.14 points or 0.9%, posting its highest point and percentage gains since Apr 25, while the S&P 500 advanced 1%, marking its best increase since Aug 14. Also, the Nasdaq ended its three straight sessions of decline and gained 1.4% on the same day, registering its best one-day rise since Jun 28.

Even the key small-cap index, Russell 2000 advanced 1.1% on Tuesday, after ending in the red for the year, a day earlier. Also, the index rose 1.2% year-to-date. Optimism over Trump’s tax overhaul policies makes small-cap growth funds a favorable investment choice. Though small-cap growth funds are believed to have a higher level of volatility compared to their large and mid-cap counterparts, they show greater growth potential in a low tax environment.

Trump’s Tax Reform in Focus

According to a Politico report, President Trump and his top associates and major congressional leaders are making efforts to formulate a framework for tax reform. In the report, multiple sources confirmed that there is a broad consensus on methods to control both individual and business taxation. These include limiting mortgage interest payments for homeowners, eliminating state and local tax deductions as well as the ability to deduct interest for small businesses.

Additionally, new proposals related to “full expensing” for small-cap companies are also expected to be made. These proposals aim to extend deductions for investments made by small businesses on new facilities and equipment. However, doubts persist over whether the Trump administration can push through this tax plan in the aftermath of the criticism that Trump has faced over his response to the Charlottesville incident. The probe into Russia’s interference in the U.S. presidential election last year is another impediment to tax reforms.

Corporate Tax Rate Likely to be Reduced

Moreover, the rate of corporate tax is expected to be reduced from the present 35% to between 22% and 25%. Significant reduction in rates is expected to boost profits of small-cap companies, which generate huge sales from the domestic market.

Last week, National Economic Council Director Gary Cohn said the “skeleton for tax reform” has been prepared and the Ways and Means Committee needs to put some muscle into “the skeleton and drive tax reform forward.” At a Louisville chamber of commerce event, Treasury Secretary Steven Mnuchin said tax legislation is "the president’s highest focus." Cohn, Mnuchin and four other members of the “Big 6” are focusing on implementing the tax reform package.

Buy These 5 Small-Cap Mutual Funds

The Russell 2000 Index gained following optimism that key Republican congressional leaders and President Trump’s top associates are working toward a tax reform framework. In the current scenario, investing in small-cap mutual funds with strong growth potential could be wise. The small-cap growth mutual funds posted year-to-date (YTD) and one-year annualized returns of 8.2% and 13.2%, respectively.

In this context, we have highlighted five small-cap mutual funds that possess above-average growth prospects and have either a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). These funds also have impressive YTD and 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.

Wasatch Ultra Growth WAMCX seeks growth of capital and income for the long run. WAMCX invests heavily in equity securities of those small-cap companies that are expected to grow at a rapid pace. The fund may invest around 30% of its assets in equity securities of foreign companies based in developed and emerging markets.

WAMCX has YTD and one-year annualized returnsof 15.3% and 16.4%, respectively, and an expense ratio of 1.33% compared with the category average of 1.41%. The fund has a Zacks Mutual Fund Rank #1.

T. Rowe Price QM US Small-Cap Growth Equity PRDSX seeks capital appreciation over the long run. PRDSX invests the lion’s share of its assets in securities of growth-oriented companies with small market capitalization. Though PRDSX primarily focuses on acquiring securities of domestic companies, it may also invest not more than 10% of its assets in securities of companies located in foreign lands.

PRDSX has YTD and one-year annualized returnsof 8.9% and 13.2%, respectively, and an expense ratio of 0.81% compared with the category average of 1.41%. The fund has a Zacks Mutual Fund Rank #1.

Invesco Small Cap Discovery A VASCX seeks growth of capital. VASCX invests a bulk of its assets in equity securities of small-cap companies that are believed to have strong capital growth prospects. The fund may allocate a maximum of 25% of its assets in foreign companies.

VASCX has YTD and one-year annualized returnsof 12.4% and 14.4%, respectively, and an expense ratio of 1.36% compared with the category average of 1.41%. The fund has a Zacks Mutual Fund Rank #2.

JPMorgan (NYSE:JPM) Small Cap Growth A PGSGX invests a huge portion of its assets in securities of small-cap companies. Small-cap companies are those which have market cap similar to those on the Russell 2000 Growth Index. PGSGX seeks long-term capital growth primarily from a portfolio of equity securities of small-capitalization and emerging growth companies.

PGSGX has YTD and one-year annualized returnsof 20.6% and 21.7%, respectively, and an expense ratio of 1.25% compared with the category average of 1.41%. The fund has a Zacks Mutual Fund Rank #1.

Fidelity Small Cap Growth FCPGX invests the majority of its assets in equity securities of small-cap companies. The fund invests both in domestic and foreign companies, which Fidelity Management & Research Company (FMR) perceives as having significant growth prospects. FCPGX invests in both U.S. and non-U.S. companies.

FCPGX has YTD and one-year annualized returnsof 14.9% and 18.3%, respectively, and an expense ratio of 1.11% compared with the category average of 1.41%. The fund has a Zacks Mutual Fund Rank #2.

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