Don't Pay Up For Actively Managed Growth Funds


Broadly speaking, mutual fund companies that issue actively managed mid- and small-cap growth funds are getting away with highway robbery. Not only are these funds pricey to own, but their managers, undoubtedly highly paid, really are not all that good at their jobs.

Again, that is broadly speaking. Not all active mid- and small-cap growth funds are dogs, but statistics say plenty are, and the privilege of owning these dogs is not easy on investors' wallets. S&P Capital IQ said the average mid-cap growth mutual fund charges 1.3 percent a year, or $130 per $10,000 invested.

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Data indicate that average fee is not warranted.

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Just 20 percent of all mid-cap growth and 12 percent of all small-cap growth funds outperformed the S&P MidCap 400 Growth and the S&P SmallCap 600 Growth indices, respectively. Meanwhile, 51 percent of all large-cap growth funds outperformed the S&P 500 Growth index, said S&P Capital IQ.

A Different Approach: ETFs

Exchange-traded funds can help investors dodge the high fees that are common with active growth funds. For example, an investor wanting exposure to the S&P MidCap 400 Growth Index can tap the iShares S&P MidCap 400 Growth (ETF) (NYSE:IJK). That $4.8 billion ETF charges just 0.25 percent a year, $25 per $10,000 invested.

IJK, which allocates about 44 percent of its combined weight to financial services and technology stocks, is up 28.9 percent over the past three years.

As S&P Capital IQ noted, actively managed small-cap growth funds have some performance issues as well, and these funds are not cheap, either.

Meanwhile, small-cap growth funds lost 2.2 percent in 2015, lagging the S&P SmallCap 600 growth index by 497 basis points; the average small-cap growth fund has a 1.4 percent expense ratio, said the research firm.

Investors looking for access to the S&P SmallCap 600 Growth Index, one of the most widely followed small-cap growth benchmarks, can turn to the $3 billion iShares S&P SmallCap 600 Growth (ETF) (NYSE:IJT). Like its aforementioned mid-cap counterpart, the iShares S&P Small-Cap 600 Growth ETF charges just 0.25 percent per year.

Small-cap growth often means significant exposure to healthcare stocks, and IJT reflects that with a nearly 20 percent weight to that sector, the ETF's second-largest sector weight. Financial services command 23.8 percent of IJT's weight.

IJT is up 33.4 percent over the past three years, an advantage of 200 basis points over the S&P SmallCap 600 Index.

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