Between Q4 16, and Q3 17, the S&P 600 posted an average -1.7% earnings decline, but over the next four quarters earnings are expected to grow by double digits each quarter. The big reason for the increased growth expectations is that small cap stocks are expected to benefit from the tax reform law due to their domestic orientations. The chart below shows the stark contrast from the previous earnings growth rates, and what is expected to be obtained for the current quarter and the following four quarters.

Further, quarterly earnings are expected to hit $9.34 billion in Q4 17, and rise up to $11.1 billion by Q4 18. Further, these growth rates are also not taking into account any improvements in future guidance in this upcoming earnings season (it is believed that the tax law will cause many companies to increase future earnings guidance during this quarter’s earnings season). The chart below shows the current dollar earnings growth rates, and as you can see they are significantly better than the previous four quarters.

Given these high expectations for small cap stocks, we identified the best small cap mutual funds to take advantage of this long term growth trend. First, we started with the Zacks Mutual Fund Screener, and looked for funds that had at least 60% exposure to small cap growth stocks, a low expense ratio, no load fees, 1 year total return of +20% or better, and a Zacks Rank #1 (Strong Buy), or a Rank #2 (Buy).From the results, we picked the top 3 (out of 5 that met these criteria).

The Picks

TCM Small Cap Growth Fund (TCMSX), a Zacks Rank #1 (Strong Buy), seeks long-term capital appreciation by investing at least 80% in stocks of small capitalization companies.

Current Sector Allocation:As of the last filing, the company has the most sector exposure in the following; Technology 32.35%, Industrial Cyclical 18.64%, Other 12.35%, Finance 8.8%, and Services 7.8%.  

Cost Specifics: There is a $2,500 initial investment requirement, it has a 0.8% management fee with a total expense ratio of 0.95%.

Performance and Management: The YTD return is +22.89%, 1 year +37.47%, 3 year 13.08%, and 5 year +18.52%.The fund is managed by Richard Johnson CFA who is the Chief Investment Officer of the Tygh Capital Management, Inc.Richard holds a M.B.A. from UCLA.

Top 5 Holdings: As of the most recent filing, the top positions are held in MasTec Inc., Lumentum Holdings, Dycom Industries, Ligand Pharma, and Kinsale Capital Group.

MassMutual Select Small Cap Growth Equity Fund;R5 (MSGSX - Free Report) , a Zacks Rank #1 (Strong Buy), seeks long-term capital appreciation by investing primarily in common stocks and equity securities of smaller companies that have potential for long-term growth. The Fund may maintain cash reserves for liquidity and defensive purposes.

Current Sector Allocation:As of the last filing, the company has the most sector exposure in the following; Finance 34.1%, Technology 20.1%, Industrial Cyclical 17.6%, Healthcare 9.7%, and Services 7.8%.  

Cost Specifics: There is no initial investment requirement, it has a 0.8% management fee with a total expense ratio of 0.96%.

Performance and Management: The YTD return is +20.33%, 1 year +29.64%, 3 year 8.42%, and 5 year +14.98%.The fund is team managed but lead by Kenneth Abrams who is a Senior Managing Director and Equity Portfolio Manager at Wellington Management.Kenneth has both a B.A. and a M.B.A. from Stanford University.

Top 5 Holdings: As of the most recent filing, the top positions are held in HubSpot Inc., 2U Inc., Entegris Inc., Insulet Corp, and Wester Alliance Bancorp.  

Columbia Small Cap Growth Fund (CSGYX - Free Report) , a Zacks Rank #1 (Strong Buy), seeks capital appreciation. The Fund will focus on growth stocks. The Fund will invest at least 80% of its net assets in stocks of companies with a market capitalization, at the time of initial purchase, equal to or less than the largest stock in the Standard & Poor's SmallCap 600 Index.

Current Sector Allocation:As of the last filing, the company has the most sector exposure in the following; Technology 20.6%, Other 14.2%, Industrial Cyclical 12.4%, Retail Trade 12%, and Finance 12%.

Cost Specifics: There is no minimal initial investment requirement, it has a 0.87% management fee with a total expense ratio of 0.93%.

Performance and Management: The YTD return is +26.18%, 1 year +37.08%, 3 year 15.77%, and 5 year +15.13%.The fund is team managed with Wayne Collette, managing Director of Columbia Management Advisors, as the lead.Wayne holds a M.B.A. in finance from the Columbia Business School at Columbia University.

Top 5 Holdings: As of the most recent filing, the top positions are held in Veeva Systems, Paycom Software, Lending Tree, Coherent Inc., and WageWorks.