Small Caps

Where the money actually sits

The category holds 24 funds and 603.1B in combined assets, and those assets are not spread evenly. Vanguard Small-Cap ETF (VB), run by Vanguard, holds 175.8B on its own, and the three largest, Vanguard Small-Cap ETF (VB), iShares Core S&P Small-Cap ETF (IJR) and iShares Russell 2000 ETF (IWM), account for 59.1 % of the total. At the other end, SPDR MSCI Emerging Markets Small Cap UCITS ETF (SPEM) manages only 400M. Size is no guarantee of quality, but it decides two very concrete things: the spread between buying and selling price you pay on every order, and the odds that the fund still exists in ten years.

The fee gap, in money

Ongoing charges run from 0.04 % for Schwab U.S. Small-Cap ETF (SCHA) to 0.74 % for iShares MSCI EM Small Cap UCITS ETF USD (Dist) (EMSM), a gap of 0.70 points, against a category average of 0.29 %. On £10,000 held for ten years that gap is roughly 700 in extra charges, before counting the return that money would itself have earned. It is the one variable in the comparison known in advance: past performance does not repeat, fees repeat every year.

Two funds in one category do not hold the same basket

The 24 funds listed track 18 different indices, among them CRSP US Small Cap, S&P SmallCap 600, Russell 2000 and CRSP US Small Cap Value. The largest tracks CRSP US Small Cap. That spread is why two funds filed under the same theme can differ by several points over a year: they hold different securities, weight them differently and rebalance on different dates. Each fund page names its index, and that is where a serious comparison starts.

Replication and domicile

23 funds hold the constituents of their index directly, 1 use a swap, including Amundi Russell 2000 UCITS ETF EUR Acc (PR2K) from Amundi. Synthetic replication often tracks more closely and reaches markets that are hard to hold directly, at the price of a counterparty risk that is regulated but real. Physical replication is easier to understand and allows securities lending, which earns the fund income and adds its own risk.

11 of the 24 funds are domiciled in US, the rest in IE and LU. Domicile sets the withholding tax the fund itself suffers on the dividends it receives, a cost absent from the stated fee but present in the return, and it also sets your own tax treatment depending on where you live.

Accumulate or take the income

11 funds accumulate dividends, 13 pay them out. The largest accumulating share class is iShares MSCI World Small Cap UCITS ETF USD (Acc) (IUSN), the largest distributing one Vanguard Small-Cap ETF (VB). The choice is not about yield, both versions of the same index return the same before tax, but about tax and discipline: the accumulating class reinvests with no cost and no decision, the distributing class pays income that is taxable in the year it arrives.

Age and critical size

The oldest fund in the category, iShares Core S&P Small-Cap ETF (IJR), launched on 2000-05-22, giving 26 years of history, and the newest, iShares MSCI World Small Cap ESG Enhanced UCITS ETF USD (Acc) (SUSM), on 2022-08-17. A long record shows how the fund behaved in a fall, which no one-year number can. A fund launched two years ago has lived through a single market regime.

None of the 24 funds manages under 100 million, the smallest being SPDR MSCI Emerging Markets Small Cap UCITS ETF (SPEM). The category is therefore clear of closure risk for want of size, the risk that forces a sale on the issuer's timetable rather than the holder's.