Tempering the Risk of Small Caps
These funds have lost less in downturns than the S&P 500.
With small-cap benchmarks lagging larger-cap counterparts during the past year, is now a good time to invest in small-cap funds? There is no easy answer to that question--for example, conventional wisdom says that rising interest rates are hard on smaller companies, but then again, the economic growth that often accompanies such increases could be a tailwind. But for most stock investors, it is always a good time to have some small-cap diversification.
Still wary? We compiled a list of small-cap Morningstar Medalists that have had lower downside capture ratios relative to the S&P 500 than Vanguard Small-Cap Index (VSMAX) has had. Note that the past three years was an unusual period that favored small-growth stocks; in fact, the Vanguard Small-Cap Growth Index (VSGAX) had less downside risk than its more diversified sibling during that time. However, six of the seven funds below had lower downside captures not only during the past three years, but the five- and 10-year periods as well. The exception is Mairs & Power Small Cap, which doesn't have a five-year record yet but is likely to continue being relatively temperate.
Laura Lallos does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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