IWF - IWF: Recession Fear Will Trigger Another Selloff

2023-03-05 03:48:08 ET

Summary

• IWF owns a portfolio of U.S. large-cap growth stocks picked from the Russell 1000 index.
• The fund underperformed in 2022 but should outperform the broader market in the long run.
• This may not be the time to invest in IWF now as a recession is likely near and the market may test its previous low.

ETF Overview

iShares Russell 1000 Growth ETF ( IWF ) has a portfolio of U.S. large-cap growth stocks. The fund basically tracks the Russell 1000 growth index. The fund underperformed the broader market in 2022 but should deliver strong long-term outperformance due to its growth characteristics. Looking forward, persistent inflation may cause the Federal Reserve to overtighten the economy and cause a recession. This may trigger another round of stock market selloff. Therefore, we think significant downside risk remains. Hence, it is better to wait on the sidelines.

Data by YCharts

Fund Analysis

IWF has outperformed the Russell 1000 and the S&P500 Index in the past

Like many other growth funds, 2022 was a brutal year for IWF. The fund delivered a total return of negative 22.78%, much lower than the Russell 1000’s loss of 14.11%. Despite this poor record last year, IWF has done very well in the long run. As can be seen from the chart below, IWF delivered a total return of 413% since 2008. This was much better than the S&P 500 and Russell 1000’s total return of 312.1% and 311.4% respectively. IWF’s growth characteristics in its portfolio was the main reason why it has outperformed these two broader indexes.

IWF has comparable performance to other large-cap growth funds

When we compare IWF with other similar growth funds in the large-cap category, IWF’s result was comparable to them. As can be seen from the chart below, its total return of 278.9% in the past 10 years was slightly inferior than Vanguard Russell 1000 Growth ETF ( VONG ) but more than 27 percentage points better than Vanguard Growth ETF ( VUG ). Similar to IWF, VONG tracks Russell 1000 Growth index, which consists of growth stocks in the Russell 1000 index. For reader’s information, Russell 1000 index consists of the top 1000 U.S. stocks by market capitalization. Therefore, both VONG and IWF are expected to have similar results. The reason that IWF had slightly inferior performance than VONG was primarily due to its slightly higher expense ratio of 0.18%. In contrast, VONG’s expense ratio was only 0.08%.

IWF has comparable downside risk to the broader market

Let us now look at IWF’s downside risk. This evaluation is important because we are currently in a bear market and that 2023 is likely going to be a year full of macroeconomic uncertainties. Although IWF has underperformed the S&P 500 and Russell 1000 index last year, in the past 2 recessions, the peak to trough drop was comparable to these two indexes. The only exception was last year. We believe the inflated valuation of technology stocks, which consists nearly 45% of IWF’s portfolio, during the COVID-19 pandemic was the reason behind IWF’s underperformance in 2022.

Should you be buyers of IWF?

We like growth funds such as IWF, VONG, or VUG as they tend to outperform the broader market in the long run. However, 2023 may continue to be a year of turbulence. We believe the low reached in October 2022 may not be the lowest we have seen as we have not yet even entered a recession. The bottom reached in October was due to the Federal Reserve’s aggressive rate hike that caused multiple compression. The market has since rebounded as the Federal Reserve has slowed down the pace of the rate hike.

Although the market has rebounded, we think the market may be somewhat too optimistic as the Federal Reserve will likely not stop the hike due to persistent inflation. The longer the Federal Reserve must keep the rate elevated, the more likely the economy will be tipped over to a recession. This may result in future earnings being revised downward. This should cause another selloff. IWF’s portfolio of growth stocks will inevitably take a hit. Therefore, we recommend investors to wait for recession fears to mount and the market to test the bottom before buying IWF.

Investor Takeaway

IWF provides investors an option to invest in large-cap growth stocks. These stocks have long runways of growth and should generate good returns for investors with a long-term investment horizon. However, given the near-term macroeconomic uncertainties, we think investors may want to wait for the market to test a new bottom before initiating a position.

Additional Disclosure : This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.

For further details see: