SPY - IUSG: Past Its Prime

2023-10-05 12:56:26 ET

Summary

• iShares Core S&P U.S. Growth ETF may be vulnerable in the short term and past its cycle prime.
• The IUSG ETF offers low-cost exposure to a broad range of U.S. growth stocks and has outperformed the S&P 500 Index over the past decade.
• However, the fund's portfolio is heavily concentrated at the top and has significant exposure to the technology sector, which could amplify potential gains and losses.

Life is like riding a bicycle. To keep your balance you must keep moving. - Albert Einstein.

I last wrote about iShares Core S&P U.S. Growth ETF (IUSG) back in November 2021, when I made clear that I believed it was a good fund for the long term, but vulnerable in the short term.

History repeats.

With hindsight, the timing on that piece was almost perfect - just around the time the large-cap bear market started entering 2022. Here we are in 2023, and growth (particularly large-cap Tech) has done remarkably well after collapsing last year. And that's the problem. This fund is again vulnerable in the short term, and may be past its cycle prime.

The iShares Core S&P U.S. Growth ETF is a fund designed to track the performance of large- and mid-capitalization U.S. equities with growth characteristics. Launched in 2000 and operating under the iShares brand, IUSG seeks to emulate the investment results of the S&P 900 Growth Index. This index includes large and mid-cap U.S. equities that display growth characteristics. The fund uses a representative sampling technique to construct its portfolio, owning about half of the stocks in the index. This approach enables IUSG to offer low-cost exposure to a broad range of U.S. growth stocks, an attractive proposition for investors eyeing long-term growth.

IUSG is particularly appealing to investors for several reasons. First, it offers a low expense ratio of just 0.04%, making it a cost-effective choice for investors. Second, the fund's holdings span a diverse array of sectors, with a significant emphasis on the information technology sector. Third, IUSG has outperformed the S&P 500 Index over the past decade, thanks to its superior growth profile.

That may be the exact problem.

The real problem here is simple. Its portfolio is heavily concentrated at the top, with the top 10 holdings accounting for 43% of its assets.

Additionally, the fund's largest holding, Apple Inc. (AAPL), alone represents more than 12% of its assets. The idiosyncratic risk is strong with this fund. So, too, is the sector composition, with Technology making up over a third of the portfolio's composition. The question is simple, then: do you really want this much exposure to Technology if entering a potential recession?

Peer Comparison

When evaluating an exchange-traded fund, or ETF, like IUSG, it's helpful to compare it with similar ETFs that could be characterized as core to a portfolio. Some of IUSG's core competitors include the SPDR S&P 500 ETF ( SPY ), the Vanguard S&P 500 ETF ( VOO ), and the iShares S&P 500 Value ETF ( IVE ). While these funds also provide exposure to large-cap U.S. equities, their investment strategies differ. For instance, SPY and VOO track the overall S&P 500 Index (SP500), while IVE focuses on the value segment of the S&P 500. Therefore, their performance may not align with IUSG, particularly during different market phases. And I think value is a far better style tilt next year as a core holding than growth.

The Verdict: Navigating the Double-Edged Sword

IUSG offers a compelling proposition for investors seeking exposure to U.S. growth stocks. Its low expense ratio, diversified portfolio, and strong historical performance make it an attractive investment choice. However, its high concentration at the top and significant exposure to the technology sector could be a double-edged sword, amplifying both potential gains and losses.

Given the looming threat of a potential recession, this might not be the ideal time to favor growth-oriented investments like IUSG. While the fund has demonstrated resilience in the past, a downturn could put a significant strain on its performance. This, to me, is not the time to bet on growth as broader risks mount.

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