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Our Analysts' Favorite Small-Cap U.S. Equity Funds

These medalists can add diversification and potentially boost returns.

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Jeremy Glaser: Investors often include small cap stocks in their portfolios to add diversification and to potentially boost returns. But which are the best funds to consider? We asked Morningstar analysts to share some of their favorite small-cap U.S. equity funds.

Greg Carlson: T. Rowe Price QM Small Cap Growth Equity is a fund that we have a lot of confidence in. It earns a Morningstar Analyst Rating of Silver. The fund is run by an experienced portfolio manager, Sudhir Nanda, who's been on the fund since 2006. He's supported by a team of nine quantitative analysts. The fund employs quantitative stock selection models.

Unlike a lot of quant funds, this one does not rely much on momentum, which tends to get a lot of quant funds into trouble around sharp market reversals. This one instead focuses on valuation and earnings quality. The record's been very strong over Nanda's full tenure, and the fund also has relatively low fees for an active fund.

Adam McCullough: Vanguard Small Cap Index is a Gold-rated fund from Morningstar and should do well going forward in the small-cap category segment. This fund tracks the US CRSP Small Cap Index, which unlike other indexes does an excellent job of buffering and reducing unnecessary turnover. 

This fund's fee is also very low at six basis points per year. Because the fee is so low and the index it tracks does a good job of reducing trading costs, we expect this fund to do well going forward. 

But also because this fund is fully invested and market cap weighted, it should also do worse during bear markets. For instance, during the financial crisis it drew down more than its peers. But since it was fully invested it more than rebounded during the bump up. We expect this fund to do well going forward and give it a Morningstar Analyst Rating of Gold.

Susan Wasserman: Conestoga Small Cap is a good option for investors looking for small-cap growth exposure. The Conestoga team looks for companies with strong balance sheets and strong fundamentals but in addition to the financials, the team really looks to triangulate a company--understanding the customer base, as well as how management is going to execute on delivering growth for the company.

Over the last few years, the team has found the most compelling options within industrials and technology. So investors should be aware that the portfolio tends to hue more closely to those sectors than the typical small-growth peer.

Despite the unevenness of the portfolio, the fund has delivered pretty consistent returns over the last 10 years, whether you're looking at it on a total or a risk-adjusted return basis. Plus, whether you're in the institutional share class or in the investor share class, the fees are quite competitive.

This video has been updated to reflect the correct data for Vanguard Small Cap Index. 

Susan Wasserman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.