The rise of small cap trackers

Emerging tracker funds could increase active investor edge
Thursday 14 Sep 2017 Author: Steven Frazer

According to analysts at UBS, UK investors could benefit from an emerging number of small cap tracker funds if UK markets follow US investment trends.

Roughly 40% of all small cap investment in the US is placed through tracker vehicles, considerably more than the circa 15% of a decade ago, according to UBS.

In the UK only around 5% of small cap assets under management is invested in tracker vehicles, and it is roughly the same in Europe.

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UBS believes greater depth and liquidity of US markets are largely responsible for the difference, although the investment bank confirms small cap trackers are growing outside of North America.

One of the chief challenges to widening the number of small cap tracker options in the UK is inconsistency in establishing what constitutes a small cap, and which indices to track. Some investors believe anything outside of the FTSE 100 index should qualify, including FTSE 250 mid cap constituents.

UBS itself runs a more pure small cap tracker; the UBS Life UK Small Company Tracker A (GB0002680576), which aims to match the performance of the FTSE SmallCap index.

Alternatively, the iShares MSCI UK Small Cap (CUKS) is an exchange-traded fund that tracks the MSCI United Kingdom
Small Cap index.

Importantly, UBS believes the emergence of additional small cap tracker funds is a plus for active investors who typically outperform benchmark indices.

‘Capital flows into passive funds are likely to distort returns, increase the information advantage to active funds, and drive cost rationalisation.’

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