Small caps have been falling behind this year: As of mid-November, the Russell 2000 is up 1.21% for 2014, while the S&P 500 is up 10.30%.
Despite the sector's underperformance this year, however, your clients may still want to consider U.S. small-cap funds over the long term. Historically, small caps tend to outperform large caps over five-year periods.
Indeed, in the last five years, the Russell has returned 102.21% while the S&P has returned 86.79%.
While some analysts now say small caps have outperformed and will endure a prolonged pullback, current market conditions give such funds unusually good opportunities, argues Richard Shuster, portfolio manager of the Robeco WPG Small/Micro-Cap Value fund. "I think we've seen a lot of bifurcation in the stock market," he says. "These bifurcations get magnified in small and micro-cap stocks."
Bear in mind, however, that while some actively managed small-cap funds may outperform the Russell, many underperform -- and charge a management fee far higher than a low-cost ETF.
Here are the five top-performing U.S. small cap funds as of Nov. 11, by five-year performance, according to Morningstar. Click through the list here.
5. Olstein Strategic Opportunities A
Total Fund Assets: $131.6M
4. Wasatch Small Cap Value
Total Fund Assets: $290.6M
3. Lazard US Small-Mid Cap Equity Instl
Total Fund Assets: $289.1M
2. Invesco Select Companies A
Total Fund Assets: $1.4B
1. Hennessy Cornerstone Growth Investor
Total Fund Assets: $261.7M
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