Small-cap stocks have historically outperformed their larger counterparts, and that has led to many investors looking more closely at small caps for their portfolios. You can find many mutual funds that offer small-cap stock exposure, and Great-West S&P Small Cap 600 Index (NASDAQMUTFUND: MXISX) seeks to track the performance of one of the most followed benchmarks in the small-cap space. Although the fund has produced impressive total returns over the past five years, its relatively high costs make it smarter to look for lower-cost alternatives to get better performance.
Great-West S&P Small Cap 600 fund facts
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What is Great-West S&P Small Cap 600 Index Fund's objective?
The investment objective of the Great-West S&P Small Cap 600 Index Fund is very simple: to track the total return of the common stocks within the S&P SmallCap 600 index. By doing so, the fund hopes to participate in the success that these companies have produced over time, taking advantage of up-and-coming new businesses with potential to grow into the corporate leaders of the future.
To accomplish this objective, the fund must invest at least 80% of assets in common stocks within the index. As a practical matter, the fund seeks to match the index as closely as possible, owning as many of the S&P SmallCap 600 stocks as possible.
What does the fund's asset allocation look like?
The Great-West fund's asset allocation mirrors the S&P index. Financial stocks make up the biggest sector allocation at more than 20%, while consumer staples, industrial, and consumer discretionary stocks each have allocations of 10% or more. Energy and utilities make up the smallest percentage of the portfolio, and the fund has almost 10% in short-term investments.
What are the fund's costs?
Expenses are a sticking point for the Great-West fund. If you can get entry into the institutional class of shares, then annual expenses of 0.25% aren't all that high for an index fund. However, the regular investor class of shares charges a 0.35% shareholder services fee, and that brings the total expense ratio up to 0.60%, which is ridiculously high for an index-tracking fund without active management. Other share classes add in a 0.25% 12b-1 fee that raises costs still further, to 0.85%.
How much income does the fund provide?
Small-cap stocks aren't known for being strong dividend payers, and so the Great-West fund doesn't produce much in the way of income. Over the past 12 months, the fund's distribution yield amounts to just 0.8% when you consider investment income from the fund. Realized net capital gains have made total distributions larger, with $0.65 per share in such distributions in 2016 boosting the effective yield of the fund to nearly 6%. Share appreciation will always be the primary source of long-term income for small-cap investors, and the fund's distribution practices over the past several years bear that out clearly.
Is the Great-West small-cap fund right for you?
Great-West S&P Small Cap 600 does a respectable job of tracking its target index, falling short by roughly the amount of its expense ratio. However, there's no reason why investors need to pay such a high fee. The exchange-traded funds Vanguard S&P Small-Cap 600 (NYSEMKT: VIOO) and SPDR S&P 600 Small Cap (NYSEMKT: SLY) both have lower annual expenses of 0.15%, and they've done a better job of tracking the S&P SmallCap 600 more closely because less money goes toward fund costs.
Having small-cap stocks in your portfolio makes sense for most investors, especially those who are seeking long-term price appreciation from their stock positions. Great-West S&P Small Cap 600 isn't the best way to get that exposure, and seeking out cheaper alternatives will add to your returns and make you more successful in the long run.
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