By Ian Salisbury

Mutual fund investors have taken it on the chin since the Trump administration unveiled more tariffs last week. Funds focusing on volatile small caps and speculative tech names got the worst of it, according to a new report from Morningstar.

President Donald Trump's bid to remake the U.S. economy by imposing hefty import duties on countries across the globe rocked Wall Street after it was unveiled in a Rose Garden speech last Wednesday. Over the next two days, the S&P 500 fell 11%, its largest two-day decline since 2020.

The market has steadied, but continues to decline. On Tuesday, the S&P 500 was down by 1.6% as traders continued to parse potential effects on markets and the U.S. economy.

Surveying the damage among dozens of mutual funds followed by Morningstar analysts, senior principal Dan Culloton concluded in a report Monday, "those owning small- and mid-cap stocks and companies with more speculative prospects or wobblier finances and business models fared the worst."

Culloton singled out several popular funds that saw big price drops. Perhaps the most prominent was the $4.4 billion Ark Innovation ETF, run by the closely watched portfolio manager Cathie Wood. The fund, which lost 14% on Thursday and Friday, was dragged down by top holdings such as Tesla and Roblox, both of which fell sharply those days.

The Ark Innovation ETF, often known by its ticker ARKK, is down by nearly 29% in 2025, compared with a decline of roughly 15% for the S&P 500. The fund declined again on Tuesday with shares down 4.2%. ARK Invest, the fund's parent, declined to comment.

Wood criticized Trump's tariffs, which the administration has sought to characterize as "reciprocal," or a response to other countries' trade barriers, in a video tweeted by Ark Invest on Saturday.

"President Trump has taken a very strong line of argument, arguing that reciprocity is necessary to create a fair playing field out there," she said. But she added, investors were "all trying to get our heads around" how the administration made its calculations around reciprocity. "It doesn't seem to make very much sense."

Other funds Morningstar singled out include the $860 million Royce Small-Cap Opportunity, which saw a 13% loss following the tariff news. While the fund is broadly diversified with nearly 230 stocks, the managers gravitate to "very small, statistically cheap stocks that often are under a cloud," leading to a "feast or famine approach," Culloton wrote.

Despite its recent troubles, Royce Small-Cap Opportunity has a solid long-term record. Over the past decade, it has returned 6.7% a year, ranking in the top 20% of Morningstar's small-cap value category, where the average return was 5.3%. Royce didn't immediately respond to a request for comment.

A similar dynamic applies to the $3 billion Fidelity Leveraged Company Stock Fund, which targets stocks with less-than-top-notch credit ratings. Fund investors endured a 14% decline on Thursday and Friday. The fund ranks among the top 5% of large-blend funds over the past five years, but in the bottom 10% over the past decade.

"While they've found some profitable contrarian ideas and turnaround stories...over the years, the portfolio has always been a volatile brew, " Culloton wrote. Fidelity didn't immediately respond to a request for comment.

Write to Ian Salisbury at ian.salisbury@barrons.com

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April 08, 2025 16:39 ET (20:39 GMT)

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