Q2 GDP Remains Robust: 5 Growth Fund Picks

According to the Bureau of Economic Analysis’ final estimate, U.S GDP increased 4.2% in the second quarter, unchanged from the earlier estimate. The fastest pace of growth in almost four years was powered by increases in investment and expenditure across several categories.

The Trump administration’s tax cuts program was the primary force that powered the expansion in the second quarter. Although the economy is expected to fall in the third quarter following tariff-related concerns, it is still on track to meet Trump administration’s annual growth target of 3%. With the domestic economy witnessing expansion, growth mutual funds have emerged as prudent investment options.

Q2 GDP Steady in Final Estimate

The third and final estimate of second quarter GDP revealed that the U.S. economy expanded at an annualized pace of 4.2% during the period, unchanged from the second estimate released in August. Higher spending and business investment were somewhat offset by a fall in private inventory investment.

The second quarter witnessed the fastest pace of growth since the third quarter of 2014. It also marked a major improvement from 2.2% pace of growth recorded in the first quarter. Overall, the economy grew 3.2% in the first half of 2018, primarily due to the Trump administration’s substantial tax cuts.

Additionally, consumer spending, which accounts for more than two-thirds of all economic activity, increased 3.8%, as previously estimated. This is the highest increase recorded since 3.9% logged in the fourth quarter of 2017 and the best growth in around four years.

Annual Growth Likely to Hit 3% Target

Another reason for the strong pace of growth in the second quarter was a major front-loading of soybean exports. These shipments were expedited to avoid China’s retaliatory import tariffs and contributed around 1.2% to the headline figure. Moreover, the annualized rate of growth is still expected to clock in at around 3%.

Several economic gauges indicate that this might indeed be the case. Small business optimism is hovering around record levels. Corporate profits remain strong and durable orders jumped 4.5% in August. Most notably, consumer confidence hit an 18-year high in September. This clearly indicates that the engine of U.S. economic growth is still humming along comfortably.

Why Choose Growth Mutual Funds?

With the U.S. economy registering steady growth in recent times, growth funds have become a natural choice for investors, who prefer capital appreciation over the long term to dividend payouts.These funds generally invest in the assets of those companies that carry an above-average growth potential.

Here, we have selected growth funds with small market capitalization and have significant exposure to the domestic market. Small-cap funds generally have a higher risk exposure but are good choices for investors seeking diversification across different sectors. Small-cap companies have lesser international exposure and are most likely to benefit from recent economic expansion.

Buy These 5 Growth Mutual Funds

Following these improvements in the U.S. economy, investors may consider growth mutual funds. According to Morningstar, small-cap growth mutual funds have one-year annualized returns of 19.8%. Here, we have selected five growth mutual funds that have a Zacks Mutual Fund Rank #1 (Strong Buy). Moreover, these funds have encouraging year-to-date (YTD) returns. They also have minimum initial investment within $5000 and low expense ratios.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

BlackRock Small Cap Growth Fund CSGEX invests the major portion of its assets in equity securities of small-cap domestic companies. According to CSGEX advisors, companies with market cap similar to those included on the Russell 2000 index are considered small-cap firms.

The fund has generated YTD returns of 22.7% and has an expense ratio of 0.75% compared with the category average of 1.34%. CSGEX has a Zacks Mutual Fund Rank #1.

Consulting Group Small-Mid Cap Equity TSGUX invests a large chunk of its assets in equity securities of small-mid cap companies, whose market cap will not exceed that of companies included on the Russell Mid Cap or the Russell 2500. The fund may also invest around one-tenth of its assets in securities of foreign companies, which are not traded on the U.S. OTC or on a U.S. exchange.

The fund has generated YTD returns of 11% and has an expense ratio of 0.63% compared with the category average of 1.34%. TSGUX has a Zacks Mutual Fund Rank #1.

Loomis Sayles Small Cap Growth Retail LCGRX invests a big portion of its assets in equity securities of small-cap companies. The fund focuses on those small-cap companies whose market cap is similar to those within the range of the Russell 2000 index or have market cap of $3 billion or lower. 

The fund has generated YTD returns of 25.9% and has an expense ratio of 1.20% compared with the category average of 1.34%. LCGRX has a Zacks Mutual Fund Rank #1.

JPMorgan Dynamic Small Cap Growth A VSCOX seeks appreciation of capital for the long run. VSCOX invests the bulk of its assets in equity securities of small-cap companies that either have market-cap similar to those included in the Russell 2000 Growth Index or have market-cap lower than $4 billion. 

The fund has generated YTD returns of 22.6% and has an expense ratio of 1.30% compared with the category average of 1.34%. VSCOX has a Zacks Mutual Fund Rank #2.

T. Rowe Price QM US Small-Cap Growth Equity PRDSX invests a huge part of its assets in securities of small-cap, growth-oriented companies. Though PRDSX primarily focuses on acquiring securities of domestic companies, it may also invest around 10% of its assets in securities of companies located in foreign countries.

The fund has generated YTD returns of 16.4% and has an expense ratio of 0.79% compared with the category average of 1.34%. PRDSX has a Zacks Mutual Fund Rank #2.

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