Favorite small cap index fund

[skunkworks]

I'm debating whether to put my money into a small cap index fund. Does anyone have any recommendations? I'm looking for a no-load fund with low maintenance fees.

Also, if there's a good reason to NOT put my money into a small cap fund but rather into something that tracks the S&P 500 or the entire market, I'd like to hear why. I'm not interested in ETFs because I want to buy more equity in the fund regularly and can't justify the commission for each transaction. God bless Scottrade and their no transaction fees for buying mutual funds. /images/graemlins/grin.gif

[Leo99]

Compare the transaction fees ot the mutual fund's fees. Look at stuff like SPYders and DIAmonds which are large cap that index the S&P 500 and the Dow Industrial Average. There's QQQ which is NASDAQ. Those fund managers make a lot of money. Who do you think is paying them? I'm biased against the mutual funds cause I don't think they do all that much better than the DIA or S&P indexes.

I like the large cap cause it's less volatile but still gives me the return I want. I keep about 65% in SPYders and 35% in individual stocks.

[DesertCat]

If you are interested in more exposure to small caps, I believe you can get index funds that track the Russell indexes, which cover most of the equity universe all the way down to (I think) microcaps. Your benefits from doing this over picking a specific small cap fund is that it is likely to outperform most small cap managers.

To sound like I'm going to contradict everything I just said (I'm not though), I do believe small caps are an area of opportunity where good managers can overcome their costs and market efficiencies to beat indexes. Personally, I only invest in small caps because I find the best opportunities there. But I don't invest in mutual funds and other managers, and don't know of any good ones to recommend.

The problem with small cap funds is, if you are a top notch small cap fund manager, your fund will grow so fast and you'll attract so large an inflow of new funds that the fund will quickly grow too big to take full advantage of small cap opportunities, so results are likely to fade over time. Plus the manager will want to make more money so they'll move up into mid-caps and large-caps, where returns will likely be mediocore, but the fund will make a ton more fees off a much larger fund size.

It's the same principle of a good poker player killing the fish at 10/20 for 2BB an hour moving up to 100/200 and only beating it for 1/2 BB an hour. The poker player makes more money, but the percentage return on his portfolio (bankroll) declines. You as a mutual fund owner care only about percentage return on your investment, not gross profits for the fund.

Lastly, you need to consider that small caps have been on a big tear the last year and a half or so, so any fund results you look at are going to be skewed, i.e. even the bad funds have done well lately. And reversion to the mean indicates that small caps in aggregate are likely to be worse performers in the future.

[Czech_Razor]

[ QUOTE ]
Also, if there's a good reason to NOT put my money into a small cap fund but rather into something that tracks the S&P 500 or the entire market, I'd like to hear why.

[/ QUOTE ]

If the money's in a taxable account you're better off going with either a balanced large cap or total market index fund because the higher rate of turnover in small cap index funds translates into a bigger tax bite. If you must get small cap exposure in a taxable account, try Vanguard Tax-Managed Small-Cap Fund (VTMSX), but be aware of the holding period requirements and larger minimum.

If we're talking a tax sheltered account, then it's a debate between Fidelity's Spartan Extended Market Index Fund (FSEMX), Vanguard's Small-Cap Index Fund Investor Shares (NAESX), and Vanguard's Small-Cap Value Index Fund (VISVX). Fidelity just started a price war with Vanguard, so the ER of FSEMX is just 0.10%; however, this is accomplished through fee waivers, so the price is subject to go back up. Vanguard, for now, is refusing to cut prices in response, but Vanguard's index funds are also managed by G. Sauter, who seems to be able to outperform the relevant indices with his trading acumen. Unless you want to add a value bent to your index fund (in which case Vanguard's the only way to go), I'd say it's a wash between NAESX and FSEMX, and you should go with the one that's cheaper based on your circumstance.

My $0.02,

@

[skunkworks]

Thanks for the replies, everyone. Very helpful stuff. I'll probably end up going with a Vanguard small cap index fund through my Roth IRA account. I'll keep researching more on the Vanguard web site.

[GeorgeF]

You might try this screener:
http://screen.yahoo.com/funds.html

The thing to note about small caps is that it is more likely that active management is of value with small cap stocks.