Madame X: U.S. Small-Cap Funds

This project is becoming bigger than I expected :) I want to keep things down to writing about 3 or 4 funds a day and so I'm going to have to split the US stock funds into sub-categories. I'll start with the small cap funds:



Yahoo have selected the S&P 500 as the benchmark - but that is a large cap index so the alphas and betas give us an idea of return and risk relative to large cap stocks rather than the small cap universe. ETRUX is an index fund which tracks the Russell 2000 index so adding back the expense ratio of 0.22% we can get an idea of what the Russell 2000 index has done. Over the last five years small caps gained 14.67% per year vs. 11.64% for large caps. But in the last three years that performance deteriorated so that in the last year small caps lost 12.39% vs. a 3.6% loss for large caps. Note that 35-40% of small cap funds out-performed this index fund. The Bridgeway fund would have been one of them over the last five years, but it's performance has deteriorated sharply to a loss of 16.4% in the last year. It certainly has not had "persistence of returns". On the other hand the Fidelity fund which is also an actively managed fund has done very nicely. It has only lost 5.29% in the last year, which is much less than the Russell 2000 has lost. This fund also has gone up the ranks relative to other small cap funds. In fact, the Bridgeway Fund is a micro-cap index fund - it tries to mimic an index of all AMEX and NASDAQ stocks smaller than the 10% smallest NYSE stocks (weird definition). So this just shows that the very smallest stocks have done even worse than other small caps in the last year.

Bottom line - active management wins here again. The small and micro cap index funds may have contributed to negative performance, especially if you have mainly invested in them in the last two years. Luckily, they are only a small part of your portfolio.