Investors gravitate to small-company stocks for a couple of reasons. Some want a dose of small companies in their portfolios to round out their exposure to the large-company stocks that dominate the market.
Other investors may want to tilt their portfolios toward small caps after a period of large-cap outperformance, such as we’ve experienced lately. The Morningstar US Large Cap Index has returned 28% in 2023, while the Morningstar US Small Cap Index has returned 20%. Large-company stocks have outlegged small-company stocks during the trailing three-, five-, and 10-year periods, too.
Before adding a small-company stock fund to your portfolio mix, though, make sure you don’t already have plenty of exposure to small-company stocks through the funds you own; Morningstar Investor’s Portfolio Manager can help you determine your portfolio’s current small-cap stock stake. While there’s no “right” allocation to small-company stocks, less than 10% of the U.S. equity market’s capitalization is in small companies, notes Morningstar portfolio strategist Amy Arnott. That suggests small-cap funds should play pretty limited roles in an investment portfolio.
If you find your portfolio is lighter in small-company stocks than you’d like, you can turn to our shortlist of the best small-cap mutual funds and exchange-traded funds for ideas to investigate further.
18 Best Small-Cap Funds to Buy for 2024
These ETFs and mutual funds all land in one of the U.S. small-cap Morningstar Categories and have at least one share class that earned our top Morningstar Medalist Rating of Gold with 100% analyst coverage as of Dec. 26, 2023.
- Boston Trust Walden Small Cap BOSOX
- Brown Capital Management Small Company BCSIX
- Champlain Small Company CIPSX
- DFA US Micro Cap DFSCX
- DFA US Small Cap DFSTX
- Dimensional US Small Cap ETF DFAS
- LSV Small Cap Value LSVQX
- Nationwide Small Company Growth NWSAX
- T. Rowe Price Integrated U.S. Small-Cap Growth Equity PRDSX
- Vanguard S&P Small-Cap 600 Value Index VSMVX
- Vanguard Small-Cap Growth Index VSGAX
- Vanguard Small-Cap Index VSCIX
- Vanguard Small-Cap Value Index VSIAX
- Vanguard Small-Cap ETF VB
- Vanguard Small-Cap Growth ETF VBK
- Vanguard Small-Cap Value ETF VBR
- Wasatch Core Growth WGROX
- Wasatch Small Cap Growth WAAEX
You’ll find both passive funds and active funds on our list of the best small-company funds. Passive strategies have several things going for them. First, of course, is their cost advantage: All of our Gold-rated index funds carry below-average expense ratios, which give them a lower hurdle to jump over to generate returns. Moreover, index funds tend to be more tax-efficient than active funds, which is a benefit for investors in taxable accounts. Finally, index funds are less threatened by asset growth than active funds.
That being said, the small-cap part of the market is an area where some active managers have been able to add value versus their respective indexes. But investors who are considering active funds, take note: Active funds that focus on less-liquid parts of the market, such as the small-cap space, sometimes close to new investors. Why? Capacity is critical for many small-cap funds to maintain their approaches. As such, the best small-cap funds may close or otherwise limit new investments on occasion to keep their focus intact. You can find out whether a fund is limiting new investment by taking a look at its report on Morningstar.com; check the Status data point on a fund’s Quote page.
Some of the names on our list of the best small-cap funds invest strictly in growth stocks, others favor value stocks, and still others blend the two. Consult a fund’s Analyst Report to learn more about its strategy.
Are Small-Cap Stocks Worth Investing In?
How to Find More of the Best Small-Cap Funds to Buy
Given their high Medalist Ratings, we expect the top-rated small-cap stock mutual funds and ETFs on our list to outperform over a full market cycle.
However, investors may want to expand their search for small-cap funds beyond this list, using parameters that matter to them. Here are just two additional ways to find small-company ETFs and mutual funds to investigate further.
- Some investors may prefer a list of top-rated funds that invest in small-cap stocks around the globe, not just in U.S. names. Using the Morningstar Investor screener, select Investment Type (either ETF or Mutual Fund), scroll down to Morningstar Category, and select Global Small/Mid Stock (if you want funds that invest in both international and U.S. smaller company stocks) or Foreign Small/Mid Blend, Foreign Small/Mid Growth and Foreign Small/Mid Value (if you want to exclude U.S. small company stocks). Then choose Gold beneath Morningstar Medalist Rating.
- Want to find a complete list of small-cap ETFs or mutual funds available, not just those with our highest Medalist Ratings? Using the Morningstar Investor screener tool, select Investment Type (either ETF or Mutual Fund) and choose the Morningstar Category—Small Blend, Small Growth, or Small Value—that you prefer. Or choose all three.
