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Fund Spy

An Opportunity to Get Small

Four great funds for small-cap exposure.

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A version of this article first appeared in the August 2019 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting the website.

The small-cap premium has been a penalty of late, and therein may lie opportunity. Shares of big companies, like Microsoft (MSFT), have outpaced those of small companies by quite a bit in recent years. So pronounced was this trend over the past year through June 2019 that the mega-cap Russell Top 200 Index's 10.9% return beat the small-cap Russell 2000 Index by 14.2 percentage points. Apart from between October 2013 and November 2014, that is the Russell Top 200's biggest one-year edge over the Russell 2000 since the late 1990s. The difference between now and that 2013-14 time period, however, is that in 2013-14, mega-cap companies' trailing 12-month earnings on average traded at a 13% to 17% discount to small-cap companies' earnings, whereas now those earnings cost about 16% more. Buying small caps may once again reward long-term investors more handsomely than mega-caps if history repeats, something that's still the case over the past two decades.

Alec Lucas has a position in the following securities mentioned above: FMIMX. Find out about Morningstar’s editorial policies.

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