The rise of small cap track­ers

Emerg­ing tracker funds could in­crease ac­tive in­vestor edge

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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.

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.’ (SF)

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