I was one happy passive investor when Credit Suisse launched their UK small cap ETF (ticker CUKS ) on the London Stock Exchange last September.

It was the first UK small cap tracker : plugging a gap in the market that denied passive investors an important route to diversification, and the potential of enhanced returns. Or so it seemed.

Sadly, now I’ve looked into CUKS, it’s not my idea of what a UK small cap ETF should be. It’s actually closer to a pricey mid cap tracker. in my opinion.

Its the law

One of the unbreakable rules of tracker-buying is to always check the index ; making sure the fund youre eyeballing adds the exposure your portfolio needs.

In the strange case of CUKS, the benchmark is the MSCI UK Small Cap index. But whats actually in this?

Its worth exploring, because theres no commonly agreed size limit for a small cap company. You can end up with some fairly big beasts falling into your ‘small cap’ index, especially if your net’s mesh isn’t very fine.

And rival UK small cap indices have very different ideas about how close to the bottom of the market theyll go when trawling for small caps:

• The FTSE SmallCap Index captures roughly 2% of companies in the 98th and 99th percentiles of the UK market.

• The RBS Hoare Govett Smaller Companies Index captures roughly the bottom 10% of the UK market.

• The MSCI UK Small Cap Index captures roughly the bottom 14% of the UK market up to the 99th percentile.

The upshot is the MSCI index is doing a lot of fishing in the FTSE 250 layer of the market. What it defines as small cap, many UK investors think of as mid cap. And that could mean some major overlap if you’re already holding FTSE 250 funds.

What’s more, CUKS has a TER of 0.58% – more than double the 0.27% TER of HSBC’s mid cap FTSE 250 index fund (which can be bought sans trading fees).

So the key question is: how much small cap coverage am I getting from CUKS that I can’t get from a FTSE 250 tracker?

In my opinion, not enough .

X-Ray vision

Morningstar’s Instant X-Ray tool enables you to probe funds for overlap.

I compared CUKS with HSBCs FTSE 250 index fund. Tellingly, Morningstar classifies both funds as mid cap. The detailed analysis of stocks held in the funds also revealed the following market cap breakdown: