Mutual Funds

Since the 2008 stock market collapse, investors have been dumping money into alternative funds. The objective of these funds is decent returns, with limited risk; a pattern of returns not positively correlated to stocks. Alternative fund categories include: long/short equity, market neutral, managed futures, bear market, and multi-alternative (multiple strategies).

There is no standard definition of a small cap stock. The methodology used deciding what stocks are included in a small cap index can result in significant return differences. As of the middle of 2014, The S&P SmallCap outperformed the Russell 2000 for 12 of the last 19 years. The Russell 2000 has been tracking small caps for 30+ years; the S&P SmallCap 600 has been around for 19+ years.

S&P SmallCap 600 vs. Russell 2000

According to a May 2014 WSJ article, after 30 years, a $200,000 mutual fund investment (8% gross annualized return) grows to $1.4 million after paying the typical mutual fund annual fee of 1.25%. This was the average expense ratio for mutual funds for 2013 (source: Morningstar). The same investment grew to $2.0 million if annualized returns were the same but a 0.04% annual expense ratio (source: ETF.com).

During the 2008 financial crisis, the average ultra-short bond fund lost 7.9% for the year; the Charles Schwab YieldPlus fund lost 35% (note: a lawsuit forced Schwab to pay a $119 million fine to settle SEC civil charges).