The Best Small

These mutual funds and ETFs focus on small-company stocks and earn Morningstar Medalist Ratings of Gold.

Investors gravitate to small-company stocks for a couple of reasons. Some want a dose of small companies in their portfolios to round out their exposure to the large-company stocks that dominate the market.

Other investors may want to tilt their portfolios toward small caps after a period of large-cap outperformance, such as we’ve experienced lately. The Morningstar US Large Cap Index has returned more than twice as much as the Morningstar US Small Cap Index so far in 2023, and large-company stocks have outlegged small-company stocks during the trailing three-, five-, and 10-year periods, too.

Before adding a small-company stock fund to your portfolio mix, though, make sure you don’t already have plenty of exposure to small-company stocks through the funds you own; Morningstar Investor’s Portfolio X-Ray feature can help you determine your portfolio’s current small-cap stock stake. While there’s no “right” allocation to small-company stocks, less than 10% of the U.S. equity market’s capitalization is in small companies, notes Morningstar portfolio strategist Amy Arnott. That suggests small-cap funds should play pretty limited roles in an investment portfolio.

If you find your portfolio is lighter in small-company stocks than you’d like, you can turn to our shortlist of the best small-cap mutual funds and exchange-traded funds for ideas to investigate further.

These ETFs and mutual funds all land in one of the U.S. small-cap Morningstar Categories and have at least one share class that earned our top Morningstar Medalist Rating of Gold with 100% analyst coverage as of Aug. 25, 2023.

You’ll find both passive funds and active funds on our list of the best small-company funds. Passive strategies have several things going for them. First, of course, is their cost advantage: All of our Gold-rated index funds carry below-average expense ratios, which give them a lower hurdle to jump over to generate returns. Moreover, index funds tend to be more tax-efficient than active funds, which is a benefit for investors in taxable accounts. Finally, index funds are less threatened by asset growth than active funds.

That being said, the small-cap part of the market is an area where some active managers have been able to add value versus their respective indexes. But investors who are considering active funds, take note: Active funds that focus on less-liquid parts of the market, such as the small-cap space, sometimes close to new investors. Why? Capacity is critical for many small-cap funds to maintain their approaches. As such, the best small-cap funds may close or otherwise limit new investments on occasion to keep their focus intact. You can find out whether a fund is limiting new investment by taking a look at its report on Morningstar.com; check the Status data point on a fund’s Quote page.

Some of the names on our list of the best small-cap funds invest strictly in growth stocks, others favor value stocks, and still others blend the two. Consult a fund’s Analyst Report to learn more about its strategy.

Given their high Morningstar Medalist Ratings, we expect the top-rated small-cap stock mutual funds and ETFs on our list to outperform over a full market cycle.

That being said, investors may want to expand their search for small-cap funds beyond this list, using parameters that matter to them. Here are just two additional ways to find small-company ETFs and mutual funds to investigate further.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.