Which Small Cap Index Fund Is Best?

Added: 2026-06-01

[00:00:00]Let's get straight into the small cap funds, then we can talk about the pros and cons of small cap stocks, whether you should include them, and if so, how much of your portfolio they should be.

[00:00:09]For some and very quick context, most global ETFs don't include small cap stocks, which is why this video is an important topic. That's problem number one. Problem two is that when it comes to small cap funds, there is currently no single one small cap fund that is truly globally diversified, which we'll go into as well in this video. Anyway, back to the funds. Unfortunately, in this case, there's actually not too many options for us as UK investors, which makes the decision much easier. Unlike global ETFs where there are more and more coming onto the market and fees keep being cut over time as I went through in one of my recent videos. And just as a quick reminder, if you do need a hand, check the first link in the description. If you put in your email, I'll send you my guide, cheat sheet, and 30-day email course all for free. As you can see, using just ETFs screen out, there are a few options. There were 16 ETFs in total. However, a lot of them seem to be ESG or screened, eight in total, and many of them are small fund sizes around 100 million or less, nine in [music] total. In reality and in my own opinion, there are three real options from this list for small cap exposure. The first two passively track the MSCI World Small Cap Index. The key details of these two funds are up on screen. One is offered by iShares with the ticker WLDS, and the other is offered by SS PDR or State Street with the ticker WOSC. You can see the returns are largely identical even over this longer time frame, which is expected as they track the same underlying index.

[00:01:40]But, I prefer the iShares version because it is larger, it has more assets under management, and importantly, is lower fee by 0.1%.

[00:01:49]But, there is a downside of both of these funds, which I'll come back to in a second. First though, there is one more option, and this is the third largest small cap ETF, the Avantis Global Small Cap Value ETF. The ticker is AVGS, and this one is actually an active fund. This is a newer fund, only launched in 2024, so it's not as long of a track record as the previous two funds, and it's actually popular. I often see people mention it in my YouTube comments when I talk about small cap funds. Even though it is an active fund, the fee is surprisingly competitive and comparable to the other two passive funds we just went through.

[00:02:25]The fee of AVGS is 0.39%. However, it is less diversified. There's about 1,300 stocks in the ETF. The aim is to put a greater weighting on companies with low valuations and high profitability. As you can see, it's actually beaten the other two passive ETFs since its inception in 2024, although it is worth pointing out that a lot of the outperformance has come so far this year in 2026. You can see here from the fund's inception to the end of 2025, the performance of these three ETFs was largely the same. Now, and this probably won't come as a surprise to regular viewers of my channel, but I'm always very skeptical of active funds. The stats, the data, and the history just show it's so difficult for active funds to consistently outperform and beat their passive index benchmarks. This outperformance has really only been in the last few months. So, the key question is, will it continue? And unfortunately, no one knows. Saying that though, even though it is an active fund, the fee is actually bang in the middle of these other two passive funds, so it's not actually that expensive, and there has been recent outperformance, which is a fact, and I'll flash the chart back up on screen. Saying that though, and of course this is just my personal preference, I personally stick to passive funds, which is why my top pick of all of these options is the iShares passive ETF WLDS.

[00:03:46]Another option, which is better in my opinion, as it has more stocks and lower fees, is this fund from Vanguard. This small cap index fund tracks the same underlying index, the MSCI World Small Cap Index. It has a lower fee and more diversification as it holds more stocks in the fund compared to the three previous funds that we talked about.

[00:04:07]However, it is a mutual fund rather than an ETF, so it's not available on that many platforms. It's only really available on the full feature DIY legacy brokers. But the main downside of all of the funds we've talked about so far, and you may have picked up of this, they're not truly global. Why is that? As these funds, these ETFs, only invest in developed market small cap stocks. So if you want full global exposure, you also need to add an emerging market small cap fund into your portfolio, and there's really one main option for this. As an honorable mention, there is this fund from iShares. However, it's quite high fee at 0.74%. So in my opinion, this ETF on screen from State Street or Spider, SPDR, is the best option for us as UK investors. This tracks the MSCI Emerging Markets Small Cap Index. It invests into just under 2,000 stocks for a 0.55% fee. The ticker symbol for this one is EMSM. So assuming you want to use a developed market small cap ETF and an emerging market small cap ETF, the next challenge, which you probably worked out, is working out how to actually weigh them in your portfolio. What percentages of your portfolio should these two funds make up? And the pain is the weightings of these do change over time as the stock market values change over time. But today, roughly based on global stock market cap weights, it would be around 10% of your portfolio for the developed market small cap ETF and around 2% for the emerging market small cap ETF. However, and you probably, once again, have clocked this, there is then the faff of rebalancing all of these various funds. But if you do want small more exposure and you are investing into a global ETF that doesn't include small cap stocks, which is pretty much every global ETF on the market right now for UK investors, this is unfortunately what you need to do.

[00:05:57]Unless you something like the FTSE Global Cap, which does already include small cap stocks in the fund, and will do all of the rebalancing for you automatically. I actually have a lot of money in the FTSE Global All Cap myself.

[00:06:09]It's my main holding to be completely transparent. But I'm conscious it's not available on very many UK platforms as is a mutual fund and not an ETF. Before we come on to why you might want to include a small cap stocks in your portfolio, there's actually one more option. This is the new Vanguard FTSE Global Small Cap ETF that was announced in this article a few months ago. This ETF, the Vanguard FTSE Global Small Cap ETF, solves this problem as it is one an ETF, so it should be available on most UK platforms once it's out, but two, this one index and this one fund that should track this index should include both developed market small cap stocks and emerging market small cap stocks.

[00:06:50]However, it's still not released at the time of recording, and we unfortunately have no idea or announcement of when this fund and also the FTSE Global All Cap ETF fund is going to launch. So, watch this space, and when they do launch, I'll be making a video straight away. Now the options, so why should you include small caps in your portfolio?

[00:07:07]The main pro is historically increased returns for investors over the long term. There is said to be a small cap premium, and that is largely in relation to small cap value stocks. There are various sources on this, but generally it's amounted to 1 to 2% per year over the long term. I also have this screenshot saved down, which I took from a Dimensional Fund Advisors video on YouTube a while back, and it sort of shows that even when Japan didn't produce a return for nearly three decades, Japanese small cap stocks actually performed massively well. Not just this, but by including them in your portfolio, you're getting the maximum diversification. So, if you believe that it's impossible to pick the winners, then you want to own as many stocks as possible in your investment portfolio, and this is also backed up by a lot of data. For example, one paper from Bessembinder in 2023 only looked at global stocks found that 2.4% of global stocks explained all net global wealth creation from the stock market from 1990 to 2020. So, by owning all stocks and as as diversified as possible, you have much more of a chance of capturing all of these returns. But, unlike anything, there are cons, and in this case there's actually quite a few of them. Small caps are riskier and more volatile. They are tiny companies, relatively speaking, so they've a much higher chance of failing.

[00:08:26]Another, which is actually a point that someone made to me in my YouTube comment section, is that they are statistically insignificant. They make up such a tiny percentage individually of the total global stock market, and as they become mid-cap stocks, they're actually picked up by the popular low-cost global ETFs, some of the ones I mentioned earlier on.

[00:08:45]As although these popular low-cost global ETFs exclude small cap stocks, they still hold large and medium-sized stocks. I think that point, that second point, is actually very convincing. And ultimately, whilst there are pros and cons, and I do understand both sides of the argument, whether you should include them or exclude them is highly unlikely, in my opinion, to derail your long-term investment returns or long-term retirement plan. I think it comes down to whether you want to be as diversified as possible, and that's because from the return perspective, sometimes they outperform and there is a premium, and sometimes they underperform and there isn't a premium. And we have no idea what way around that is going to be going forward. So, I really think it's a matter of diversification. The other point worth making is that it's also a matter of fund availability on the platform you're using. You can get small cap exposure by investing into the FTSE Global All Cap if you're using a full-featured DIY broker that offers that fund. Or, if you're using a low-cost DIY platform, most of which don't offer mutual funds, then you would need to invest into a low-cost global ETF and add in both a developed market small cap ETF and an emerging market small cap ETF. But, I do appreciate that does overcomplicate your investments. It is a bit of a faff, and you'll need to rebalance over time. You might just prefer to stick to a simple low-cost global ETF, which will capture largely the same returns over the long term anyway. Ultimately, it's up to you. So, let me know in the comments down below what you make of all of this and whether you include small caps in your portfolio or not. As I mentioned, and just to be transparent, my own largest investment is the FTSE Global All-Cap. However, I do also have money in quite a few other low-cost global ETFs, generally a different one on each different platform that I use, from ACWI, VWRP, PACW, and FWRG. But, if you are using a low-cost platform and you do want to build this three-fund global ETF portfolio, the DIY global ETF portfolio that I've talked about, then watch this video here next on screen, and I'll go through exactly how you can do that.