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Q3 GDP Remains Robust: 3 Fund Picks

Zacks Equity Research
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According to the Bureau of Economic Analysis’ first estimate for the third quarter, U.S GDP exhibited growth in the period, albeit moderately lower compared to the prior quarter. However, the GDP growth surpassed consensus estimate for the period.

Also, a dip in business spending was negated by an uptick in consumer spending. Moreover, economists estimate that the economy will continue to expand at 3% in the fourth quarter. With the domestic economy witnessing expansion, growth mutual funds have emerged as prudent investment options.

Consumer Expenditure Grows Stronger

The U.S. GDP increased 3.5% in the third quarter, marginally higher than the estimated level of 3.4%. However, this metric declined slightly from the second quarter’s 4.2% pace, the fastest quarterly increase since the third quarter of 2014.

Notably, the economy’s expansion over the last two quarters has been the fastest since 2014. Meanwhile, consumer spending, which accounts for around two-thirds of GDP, increased at an annual pace of 4% in the third quarter. This marked a significant improvement from the 3.8% pace witnessed in the prior quarter.

Further, this is the sharpest pace of growth in consumer expenditure witnessed in around four years. A robust job market and a steady increase in wages have given a boost to consumer spending in the recent past. Substantial tax cuts implemented by the Trump administration late last year has also been instrumental in boosting economic growth. 

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.

3 Best Choices

Given such circumstances, we have highlighted three growth mutual funds that are poised to gain from such factors. These funds also carry a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). Moreover, these funds have encouraging three and five-year returns. Additionally, the minimum initial investment is within $5000.

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.

The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

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.

This Sector – Small Cap Growthproduct has a history of positive total returns for over 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 16% and 11.6%, respectively. To see how this fund performed compared to its category, and other #1 and 2 Ranked Mutual Funds, please click here.

CSGEXhas a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.82%, which is below the category average of 1.23%.

Vanguard Explorer Investor VEXPX normally invests its assets in common stocks of small and mid-cap companies, which are expected to have strong growth prospects. The fund generally offers very little or no dividend income.

This Sector – Small Cap Growth product has a history of positive total returns for over 10 years. Specifically, the fund has returned 18.4% over the three-year and 11.8% over the five-year benchmarks. To see how this fund performed compared to its category, and other #1 and 2 Ranked Mutual Funds, please click here.

VEXPX carries a Zacks Mutual Fund Rank #1. The fund has an annual expense ratio of 0.43%, which is below the category average of 1.23%.

Bridgeway Small-Cap Growth Fund BRSGX maintains a diversified portfolio by investing a large share of its assets in small-cap companies, having impressive growth prospects. BRSGX invests in companies that are listed on the NYSE, NYSE MKT and NASDAQ.

This Sector – Small Cap Growth product has a history of positive total returns for over 10 years. Specifically, the fund has returned 17.5% over the three-year and 13.4% over the five-year benchmarks. To see how this fund performed compared to its category, and other #1 and 2 Ranked Mutual Funds, please click here.

BRSGX carries a Zacks Mutual Fund Rank #2. The fund has an annual expense ratio of 0.94%, which is below the category average of 1.23%.

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