Penny Stock Mutual Funds – Love Or Hate?

| May 26, 2015

mutual fundsDo You Hate Penny Stock Mutual Funds? You Should.  Here’s Why… 

Welcome back everyone.  I hope you had the opportunity to enjoy the beautiful Memorial Day Weekend.

I took the family up north to the cabin.  Flagstaff, Arizona is a wonderful retreat, away from the heat of the desert.

Clean air, the fresh smell of the pines, and cool weather… it doesn’t get much better.  The dogs loved hiking the trails and the horses were full of enthusiasm!

But now, we’re back to work today… and today I’m going to cover something very important.

I’m going to share with you why Penny Stock Mutual Funds are a bust in my mind.

It doesn’t take a rocket scientist to see the problems… but these funds still manage to gather hundreds of millions of dollars from investors.  It’s mind boggling.

But before we get there, some important news…

Russell Indexes Rebalance In 3 Days – Watch Out!

That’s right.  The famous Russell family of stock indexes rebalances their holdings at the end of May… so you probably want to sidestep trading for a few days.

As many of you know, Russell indexes are widely tracked by Wall Street… and a number of ETFs have popped up following these indexes very closely.

The problem is there are a number of stocks “on the bubble”.

See, Russell chunks their indexes by number of companies… For example, the penny stock index we follow is the Russell 2000 Small Cap Index $RUT.

The Russell Funds take the top 3000 stocks in the market and then they rip out the BOTTOM 2,000 stocks to make up the Russell 2,000.

As you probably guessed, there’s a lot more than 3,000 stocks trading on the markets… so where they draw the line is critical.

I’ve heard rumors of fund managers buying some stocks and shorting others to make sure some their favorite portfolio stocks make the cut…

Barrons recently noted:

“When a change to a widely followed stock index is announced, traders can step in to buy shares before they enter the benchmark, driving up the price. …. [some funds have] the potential to spur exaggerated, if temporary, price swings in some illiquid stocks.”

As you can imagine, there’s a lot of money on the line.  And on Wall Street, that causes ethics to go out the window!

So trade carefully…

The Good – Penny Stock Mutual Funds

Penny stock mutual funds are very popular right now… and despite my aggressive headline for this article, in some cases, penny stock mutual funds have their place.

For example… if you’re not a penny stock trader, don’t watch the stock market, don’t do any research, and generally follow the advice of others… then Penny Stock Mutual Funds are probably good for you.

They’re an easy way to get into a lot of microcap stocks… they provide extensive diversification.

So, if that’s you… take a look at adding some of these small cap mutual funds to a part of your portfolio.  Please, please, please don’t invest your life savings in these mutual funds.

Here’s a few you might look at:

  • AllianzGI Ultra Microcap Fund $AUMIX
  • Royce Micro-Cap Fund $RYOTX
  • Wasatch Micro Cap Fund $WMICX
  • Rowe Price Small-Cap Value Mutual Fund $PRSVX
  • Bridgeway Ultra-Small Company Market $BRSIX

There are a bunch of others, but that’s the start of a good list of penny stock mutual funds.

Now personally, I think these Penny Stock Mutual funds are the devil.

Seriously, here’s why…

I Hate Penny Stock Mutual Funds – And You Should Too!

Alright, I’m pulling the gloves off.

I hate penny stock mutual funds and here’s why:

One – They are too diversified.

Two – You can do better on your own, and

Three – They charge ridiculous fees!

Let’s look at these three problems one at a time.

First, the diversification issue.  I’ll be the first to tell you a properly diversified portfolio is a must… especially for trading penny stocks.

But the safety diversification gives you also kills your upside potential.  Here’s an example… If you own 10 penny stocks… with 10% of your portfolio in each investment… you’re taking on some risk, but you’re also positioned to capture big upside.

If one of those penny stocks jumps 1,000% (which does happen), you’ve just DOUBLED the size of your portfolio!

Do the math.  You’ll see what I mean.

But take one of these penny stock mutual funds… they’re too diversified.  The Royce fund holds 196 different stocks.

The largest holding is 1.5% of the portfolio.

If that one stock… the one they own the most of… jumps 1,000%… the entire fund gains a paltry 15%.  That is if the other stocks don’t drag down the performance!

What you’re doing is trading away the potential for huge, life changing gains… for the safety of diversification.

If that’s not bad enough, we come to problem #2 – you can do it better yourself.

I honestly believe the average investor can out manage and out pick every mutual fund on the planet.  You know why?  Because it’s your money and nobody cares for it more than you will.

Consider this… in the last 10 years, the Wasatch Micro Cap fund has shown annual returns of 7.3%… not bad.  Until you look at the Russell 2000.  That unmanaged index has returned 9.18%.

Of course they don’t say if that’s BEFORE or after expenses… but either way, does it matter?

Why pay someone who can’t beat the averages.  Oh, by the way, most mutual fund managers don’t beat their benchmarks.

Speaking of expenses… this brings us to my major objection number #3.

You know I saved the best for last.

The expenses charged by penny stock mutual funds are ridiculous:

  • AllianzGI Ultra Microcap Fund $AUMIX charges 2% EVERY YEAR
  • Royce Micro-Cap Fund $RYOTX charges 1.52% EVERY YEAR
  • Wasatch Micro Cap Fund $WMICX charges 1.9% EVERY YEAR!
  • Rowe Price Small-Cap Value Mutual Fund $PRSVX charges 0.96% EVERY YEAR!
  • Bridgeway Ultra-Small Company Market $BRSIX charges 0.72% EVERY YEAR!

Look, if you’re making money hand over fist, good for you… you can probably afford to give away 1% or 2% of your PORTFOLIO every year.

Not me.  I prefer to trade my own penny stocks using a cheap online broker… and save myself the crazy fees.

If that’s not enough to make you hate penny stock mutual funds, I don’t know what is. Now before we go, I want to share an insider piece of advice easily worth $1,000 bucks…

My $1,000 Insider Tip On Penny Stock Mutual Funds

Are you ready…

Write this down.

If you like the idea of someone else doing research for you, you can always find out what these funds are investing in!

YES – you can legally STEAL their investment ideas.


Scoot on over to the SEC.GOV website and type in the name of the fund… then take a look at their quarterly and annual reports.

Inside of these reports is a list of every investment they own.

Why not take that list of several hundred penny stocks… and cherry pick the best ones.  You can do your own research, find your own hot penny stocks… and own the cream of the crop!

It’s a LEGAL way to steal all their hard work… and you don’t have to pay the ridiculous fees they charge.

Oh and don’t forget… I publish a newsletter exposing some of the hottest penny stocks I can find.  It’s how I pay the bills… and believe me, I don’t charge anywhere near the 2% some of these crazy penny stock mutual funds charge.  If you’re interested, take a look at my Penny Stock All-Stars service.

Good investing….

Brian Kent

Note:  If you’re interested in learning more about Brian Kent’s Penny Stock All-Stars premium service… and learning about the stocks we’re trading for profit… you can get the inside scoop on penny stocks here.

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Category: Trading Penny Stocks

About the Author ()

Brian Kent is the Editor for He also pens Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market's next Blue Chips.