Market Overview

Small-Cap ETFs Top Active Rivals

Small-Cap ETFs Top Active Rivals

Actively managed funds are under considerable pressure, much of it coming courtesy of lower-cost, passively managed exchange-traded funds. However, active's advocates, of whom there remain plenty, believe there are asset classes and market segments where active management works for investors.

One of those areas is small-cap equities. Indeed, there are some fine actively managed mutual funds dedicated to smaller stocks. The unfortunate reality is the odds are stacked against investors finding their way to the active small-cap funds that really shine.

Diamond In The Rough

“Overall, just 10 percent of all domestic equity mutual funds outperformed the multi-cap S&P 1500 Index in 12-month period ended June 2016, with 13 percent and 5 percent out gaining in the respective three- and five-year periods. Digging deeper into the 12 investment categories across market capitalization (large-, mid-, small-, and multi-cap) and styles (growth, core, and value), large-cap growth and small-cap core funds stood out the most unfavorably in the three-year period,” said S&P Capital IQ in a note out Monday.

Related Link: Where The Cash Is At Among Sector ETFs

As S&P Capital IQ points out, a mere 4 percent of active small-cap managers outperformed the S&P SmallCap 600 Index. On its own, that statistic is shameful, but it is made even more so when noting that the average actively managed small-cap core fund charges a staggering 1.2 percent per year, or $120 on a $10,000 investment.

Lots Of Income For A Job Poorly Done?

Translation: A lot of active small-cap managers are getting paid a lot of money to not be very good at their jobs. Isn't Wall Street great?

Well, Wall Street isn't all that bad, because that is where exchange-traded funds come from. The iShares S&P SmallCap 600 Index (ETF) (NYSE: IJR), which tracks the aforementioned S&P SmallCap 600 Index, is up 28 percent over the past three years. Investors owning that ETF pay just $12 a year on a $10,000 investment, or the equivalent of two trips to Starbucks.

Investors willing to pay a bit more in fees, though still much less than the comparable active fund, should consider the WisdomTree SmallCap Dividend Fund (ETF) (NYSE: DES). DES, the leader among small-cap dividend ETFs, is passively managed and does what many active counterparts do not: outperform the S&P SmallCap 600.

Over the past five years, DES topped 99 percent of active funds in its Morningstar category and its annual fee of 0.38 percent is less than a third of that found on the average actively managed small-cap fund.

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