How To Save Big On Small-Cap Growth Funds

One of the main reasons why so many advisors and investors have ditched actively managed mutual funds in favor of passive exchange traded funds is cost.

Data confirm the average expense ratio on passive ETFs is significantly lower than that of the average actively managed mutual fund and that holds true across a variety of market capitalization segments, including small caps.

What Happened

Small-cap funds, be they active mutual funds or passive ETFs, that emphasize the growth factor are popular with advisors and investors. Thing is some actively managed small-cap growth funds carry high fees. Just look at the Alger Small Cap Growth Fund (ALSAX), which charges 1.38 percent per year, or $138 on a $10,000 investment.

By some estimates, that fee level is above average. ALSAX's category is small-cap growth and its investment style is mid growth, according to Morningstar. That means the field of low-cost ETFs that are highly correlated to ALSAX is expansive.

Why It's Important

Data from Raltin indicate a slew of cost-effective ETFs sport intimate correlations to ALSAX. For example, the Invesco Russell MidCap Pure Growth ETF PXMG has a correlation of 0.94 to the active ALSAX, according to Ralitn data. PXMG has an expense ratio of 0.39 percent, or $39 on a $10,000 investment, and a four-star Morningstar rating compard to three stars on the Alger fund.

The active ALSAX tries to beat the Russell 2000 Growth Index. Rather than attempting to beat that index, investors can track it via the iShares Russell 2000 Growth ETF IWO. That ETF charges just 0.24 percent per year and has a correlation of 0.94 to ALSAX.

Fees are a major consideration with a variety of equity funds, but those costs take on increased importance in the small-cap space because data suggest small-cap managers have a hard time beating their benchmarks. For the five yeas ended June 30, 2018, 92.9 percent of active small-cap managers lagged their benchmarks, according to S&P Dow Jones Indices.

What's Next

Over the past year, 33 ETFs have correlations of 0.90 or more to ALSAX, according to Raltin data. All of those funds have lower fees and many have annual expenses ratio below 0.50 percent.

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