I was one happy passive investor [1] when Credit Suisse launched their UK small cap ETF (ticker CUKS) on the London Stock Exchange last September.
It was the first UK small cap tracker [2]: plugging a gap in the market that denied passive investors an important route to diversification, and the potential of enhanced returns. Or so it seemed.
Sadly, now I’ve looked into CUKS, it’s not my idea of what a UK small cap [3] ETF should be. It’s actually closer to a pricey mid cap tracker, in my opinion.
It’s the law
One of the unbreakable rules of tracker-buying is to always check the index [4]; making sure the fund you’re eyeballing adds the exposure your portfolio needs.
In the strange case of CUKS, the benchmark is the MSCI UK Small Cap index. But what’s actually in this?
It’s worth exploring, because there’s no commonly agreed size limit for a small cap company. You can end up with some fairly big beasts falling into your ‘small cap’ index, especially if your net’s mesh isn’t very fine.
And rival UK small cap indices have very different ideas about how close to the bottom of the market they’ll go when trawling for small caps:
- The FTSE SmallCap Index captures roughly 2% of companies in the 98th and 99th percentiles of the UK market.
- The RBS Hoare Govett Smaller Companies Index captures roughly the bottom 10% of the UK market.
- The MSCI UK Small Cap Index captures roughly the bottom 14% of the UK market up to the 99th percentile.
The upshot is the MSCI index is doing a lot of fishing in the FTSE 250 layer of the market. What it defines as small cap, many UK investors think of as mid cap. And that could mean some major overlap if you’re already holding FTSE 250 funds.
[5]
What’s more, CUKS has a TER [6]of 0.58% – more than double the 0.27% TER of HSBC’s mid cap FTSE 250 index fund (which can be bought sans trading fees).
So the key question is: how much small cap coverage am I getting from CUKS that I can’t get from a FTSE 250 tracker?
In my opinion, not enough.
X-Ray vision
Morningstar’s Instant X-Ray tool enables you to probe funds for overlap.
I compared CUKS with HSBC’s FTSE 250 index fund [7]. Tellingly, Morningstar classifies both funds as mid cap. The detailed analysis of stocks held in the funds also revealed the following market cap breakdown:
| Large cap | Mid cap | Small cap | ||
| CUKS | TER 0.58% | 0.92% | 57.29% | 41.79% |
| HSBC FTSE 250 | TER 0.27% | 4.9% | 56.50% | 38.59% |
Morningstar Instant X-Ray analysis, January 8, 2011.
According to those stats, buying CUKS would gain me only a few extra percentage points of small cap stocks in my portfolio [8] over a regular FTSE 250 index fund.
Yet I’d be paying more than double the TER plus trading fees for the privilege.
You can check the constituents of CUKS on Credit Suisse’s website [9]. Go to Products > Equity > UK > CS ETF (IE) on MSCI UK Small Cap > Portfolio Structure. Most holdings are FTSE 250 firms. Fewer than a quarter are from the FTSE SmallCap or FTSE AIM All-Share, at the time of writing.
It looks like a poor deal in my book. I am prepared to pay a higher TER for a fund that tracks an index like the FTSE SmallCap. But I’m not paying well over the odds for a mid cap ETF with a small cap accent!
Take it steady,
The Accumulator