The ‘non-existence’ of small and mid-cap ETFs
There are unlikely to be dedicated small and mid-cap exchange traded funds but investors can get exposure to that space via thematic funds, according to providers.
There have been few products launched in this space as it tended to be one where active management played a larger part in adding value due to the large stock universe. Their smaller size also meant they were less liquid than large-cap equities.
Out of 119 funds in the Australian Core Strategies Australian small and mid-cap sector, just five identified themselves as ETFs and none had outperformed the sector average.
These were BlackRock iShares S&P/ASX Small Ordinaries ETF, BetaShares Australian Small Companies Select, VanEck Small Cap Dividend Payers ETF, VanEck Vectors S&P/ASX MidCap ETF and Vanguard MSCI Australian Small Companies Index ETFv.
All five of these funds had underperformed the index over one year to 31 May, according to FE Analytics, with the best-performing ETF being BetaShares Australian Small Companies Select which returned 34.7% versus sector returns of 37.4%.
The main reason for the lack of product in the space was the lack of the liquidity in the small-cap space and providers said there were “limited opportunities” to launch ETFs in the space.
Ilan Israelstam, head of strategy and marketing at BetaShares said: “ETFs are unable to manufacture liquidity when the underlying exposures lack it. By definition, the small and mid-cap space has a lower level of liquidity so there are fewer options to create targeted exposures to this space beyond quite a broad small/mid cap index without compromising on liquidity.”
Luke McMillan, head of research at small-cap boutique Ophir, said ETFs in this space were “virtually non-existant” and those that existed were passive index trackers.
“One of the key reasons why so few active Australian small cap ETPs exist is the lower liquidity in the space compared to large caps and the risks and costs this brings to bear for ETP providers and the market makers they use. This results from the ETP structure having to provide intra-day liquidity which can sometimes be much harder to do across a full portfolio where some holdings may take more than a day to exit.
“Australian small caps are one of the few asset classes where the majority of [active] managers outperform the market benchmark over the long term.”
Kanish Chugh, head of distribution at ETF Securities, suggested investors who were seeking a passive exposure in the small-cap space look at thematic funds.
“There are some ETFs in that space but it is mostly thematics where you have a tilt to smaller companies such as robotics firms. They are out there but they are not necessarily labelled as being ‘small and mid-cap’, it is about lifting the bonnet up.”
He gave the example of the ETFS ROBO Global and Automation ETF where almost half of the portfolio was invested in mid-cap stocks.
AUTHOR
Laura Dew
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