Least Expensive Fund with a 7.2% Paid Rate That Isn't Already in Your Portfolio
In a potential shift in the investment landscape, small-cap focused funds are gaining traction over large cap index funds, as suggested by a recent headline from the Financial Times. One such fund that has been making waves is the Royce Small-Cap Trust (RVT).
RVT, managed by investment firm Royce & Associates, has been outperforming the iShares Russell 2000 ETF (IWM) significantly. The total market price return for RVT stands at 5.8%, while IWM hovers around the 1.1% mark. Moreover, RVT's total net asset value (NAV) return is near 10%, outperforming the small-cap index's 6.6%.
The Royce Small-Cap Trust focuses on smaller companies with promising cash flow growth. This focus has allowed it to generate "alpha", earning more than the index it tracks. Its high performance could reinforce itself as more investors buy, rewarding early investors.
RVT's high returns are particularly attractive in the volatile small-cap market. The fund's dividend payments, amounting to 7.2%, make it an attractive way to invest in this asset class. In comparison, IWM only pays a 1.1% dividend.
The outperformance of small-cap focused closed-end funds could be a response to the recent trend of large cap stocks outperforming small caps in the last few years. Big Tech, which makes up a significant portion of the large cap market, has been getting pricier in relation to the rest of the market since 2022. The 10 biggest S&P 500 firms make up a quarter of the index's earnings and 40% of its market cap, indicating a potential imbalance.
This unsustainable trend could prompt investors to look for alternatives to Big Tech, leading to increased attention for small caps. Michael Foster, the Lead Research Analyst for Contrarian Outlook, has been advocating for this shift, stating that pairing RVT with a CEF holding different assets can be a strategy to secure a large income stream and position for gains.
However, it's worth noting that RVT's discount to NAV has been widening in 2025 and recently hit double digits. This could be a sign of overvaluation or a buying opportunity, depending on one's investment perspective.
In conclusion, the Royce Small-Cap Trust (RVT) offers a high dividend and has been outperforming the iShares Russell 2000 ETF (IWM) in the small-cap market. As more investors seek alternatives to Big Tech, small-cap focused funds like RVT could become increasingly attractive.
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