The Index Behind Small Cap ETFs Matters | ETF Trends

By Todd Rosenbluth, CFRA

The S&P 500 is easily the most tracked U.S. large-cap equity benchmark by index investors and is behind three of the largest ETFs. However, investors of U.S. listed small-cap funds have chosen to split their $233 billion in ETF assets, as of July 2019, more evenly between indexes offered by three main providers. While there’s much attention on the asset manager league tables comparing iShares, Vanguard, SSGA and others, index-provider data is rarely highlighted even as their criteria drives what’s inside most ETFs. According to data from First Bridge, a CFRA business acquired in August, FTSE Russell had the highest small-cap market share (34%), closely followed by S&P Dow Jones Indices (33%) and the Center for Research in Security Prices or CRSP (21%) at the end of July.

Source: First Bridge Data, a CFRA Business. July 2019

iShares Russell 2000 (IWM) and iShares Core Small Cap (IJR) were the two small-cap ETFs with the most assets at the end of July and both launched in May 2000. However, IJR has gathered significantly more assets since early 2017, as investors focused increasingly on the expense ratios of asset-allocation-oriented funds. The $45 billion in assets IJR took in $12 billion of net inflows in the last two-and-a-half years, charges a modest 0.07% expense ratio. This is less expensive than the 0.19% fee for $43 billion IWM, which pulled in just $1.3 billion of new money since the end of January 2019.

Yet, Vanguard has had more success in the small-cap space with ETFs tied to CRSP indexes. Vanguard Small-Cap Index ETF (VB 151 Marketweight) was recently the third largest small-cap ETF with $26 billion ETF in assets aided by $5.2 billion of net inflows in the last two-and-a-half years. VB charges a miniscule 0.05% expense ratio.  

CFRA does not encourage our clients to review equity ETFs solely based on past performance, favoring our view that there’s a focus on understanding the valuation and risk considerations of its holdings, the costs and the technical trends. However, IJR generated a 12.0% three-year annualized total return as of July 2019 and outperformed IWM and VB by approximately 170 and 100 basis points. IJR owes its performance success largely to S&P Dow Jones Indices and what’s inside the ETF much more than its expense ratio or tracking ability.  

The data used to drive this research stems from CFRA’s August acquisition of First Bridge Data. To learn more about the deal or CFRA’s ETF research on approximately 1,500 equity and fixed income ETFs visit https://www.cfraresearch.com/news-details/first-bridge/.

This thematic research was originally published on MarketScope Advisor https://www.cfraresearch.com/marketscope-advisor/. CFRA looks to continually improve the quality and delivery of our research. To ensure that you continue to receive this and other relevant content from CFRA, please submit your contact details here.