5 Best U.S. Small-Cap Index Mutual Funds

Investing in the small-cap sector can offer significant opportunity for growth. Small-cap companies have relatively small market capitalization, or market value of their outstanding shares, of between $300 million and $2 billion. These companies have more room to increase their revenues compared to large-cap companies, which are often close to their maximum growth potential. Small-cap index mutual funds can add diversified exposure to the sector's equities, but they can also be more volatile than large-cap indexes.

Some highly rated small-cap mutual index funds include the Vanguard Small-Cap Index Fund (NAESX), the Fidelity Small-Cap Enhanced Index Fund (FCPEX), the ValueLine Small-Cap Opportunities Fund (VLEOX), the Fidelity Small-Cap Index Fund (FSSPX) and the Vanguard Small-Cap Growth Index Fund (VISGX). The information included here was current as of Oct. 10, 2018.  

The Vanguard Small-Cap Index Fund provides wide exposure across the small-cap sector of the U.S. equities market. The fund tracks the CRSP U.S. Small-Cap Index as its benchmark. The fund contains 1,413 stocks with net assets of $97.60 billion. The median market cap of companies in the fund is $4.5 billion.

The top 10 holdings comprise 3.10% of the fund’s total assets. The largest holding is WellCare Health Plans Inc., followed by GrubHub Inc. Holdings in the financial sector have the largest weighting, at 24.70%, followed by the industrial sector, at 19.50%. The consumer services sector has the third-largest allocation at 12.80%.

Many investors are drawn to Vanguard funds because of their low expense ratios, and this fund is no exception, with a competitive expense ratio of 0.17%. 

The Fidelity Small-Cap Enhanced Index Fund seeks capital appreciation by investing at least 80% of its assets in stocks contained in the Russell 2000 Index, which is a market capitalization-weighted index that tracks small-cap companies. The fund uses quantitative analysis to select stocks with the potential to outperform the Russell 2000. 

The fund has assets of $811.64 million, with an expense ratio of 0.64%. The Fidelity Small-Cap Enhanced Index Fund is more selective of the stocks it has in its portfolio than its benchmark index, so it only has 481 holdings. The 10 largest holdings comprise 6.78% of the total portfolio. The largest sector allocation is to information technology, with a weighting of 16.66%, with the health care sector following close behind at 16.56%.

The ValueLine Small-Cap Opportunities Fund seeks long-term appreciation of capital by investing at least 80% of its portfolio in small-cap companies. It may invest in mid-cap companies, as well. 

The fund has net assets of $476 million and a relatively high expense ration of 1.21%. Its top allocations are in the industrial sector, at 33.40%, information technology, at 19.75%, and consumer discretionary, at 12.84%. 

The ValueLine Small-Cap Opportunities Fund has outperformed the Russell 2000 Index over one-year and five-year periods. On the flip side, the fund does have a substantial risk to a big move down in the markets.

The Fidelity Small-Cap Index Fund is a newer fund that began trading in 2011. The fund seeks to provide investment results that correspond to the total return of small-cap stocks in the United States. The fund invests at least 80% of its assets in stocks in the Russell 2000 index.

The fund has $6.56 billion in net assets with a very reasonable expense ratio of 0.03%. The fund is well-diversified, with 1,963 stocks, and the top 10 stocks holding only 2.19% of the total portfolio. The financial sector has the largest portfolio allocation, at 17.66%, followed by health care at 16.19%. The information technology sector is third, at 15.31%.

The Vanguard Small-Cap Growth Index Fund is another option that provides exposure to small-cap U.S. growth stocks, and it's benchmark is the Spliced Small-Cap Growth Index. The fund, which began trading in 1998, has $25.70 billion in assets with an expense ratio of 0.19%.

The fund has 651 holdings, and the median market cap of the companies is $5.1 billion. The technology and industrial sectors tie for the largest allocation of assets, at 19% each, and the health care sector has the next largest, at 17.60%, followed by the financial sector at 16.40%.