ROSC - IWN: If 2024 Is For Value And Small Caps

2024-01-08 15:30:32 ET

Summary

• iShares Russell 2000 Value ETF offers exposure to undervalued small-cap U.S. equities.
• The IWN ETF has a well-diversified portfolio with top holdings in the energy, banking, and construction sectors.
• Investing in IWN can provide higher returns and diversify a U.S. stock allocation, but carries risks of lower stability and higher volatility.

I've talked before about the idea that we may see a broad rotation into value over growth, and small from large, which is why the iShares Russell 2000 Value ETF (IWN) stands out right here and right now for those seeking exposure to small-cap U.S. equities that exhibit value characteristics. Launched on July 24, 2000, IWN is a product of BlackRock (BLK), one of the world's leading asset management firms.

The IWN exchange-traded fund, or ETF, seeks to track the investment results of the Russell 2000 Value Index, a benchmark composed of small-capitalization U.S. equities that are considered undervalued by the market relative to comparable companies. The fund has net assets of approximately $12.14 billion and has an expense ratio of 0.24%. IWN offers quarterly distributions, making it an attractive choice for investors seeking regular income in addition to capital appreciation.

A Look At The Portfolio

IWN holds 1,424 holdings, making it an extremely well-diversified fund. Its top ten holdings accounted for about 4.64% of the fund's total net assets. No holdings make up more than 0.54% of the portfolios. The top 5 holdings include:

1. Chord Energy Corp - an independent oil and natural gas company focusing on the procurement, enhancement, and extraction of oil and natural gas reserves, chiefly within the Rocky Mountain area of the U.S.
2. SouthState Corp - a bank and financial holding company that offers a comprehensive range of banking services and products through its subsidiary/
3. Murphy Oil Corp - a global oil and gas exploration and production company with a focus on deep water and unconventional resource opportunities.
4. Meritage Corp - the fifth-largest public homebuilder in the United States, specializes in designing and constructing a variety of homes targeting entry-level and first move-up buyers.
5. UFP Industries - a diversified company specializing in providing a broad range of wood and wood-alternative products for retail, industrial, and construction markets.

IWN's portfolio is diversified across a variety of sectors, with Financials making up the largest chunk. This isn't a bad thing given that there is real potential for mean reversion to work in the sector's favor this year relative to Technology.

Peer Comparison

In the small-cap space, the performance of the Hartford Multifactor US Equity ETF ( ROUS ) and the Hartford Multifactor Small Cap ETF ( ROSC ) are worth comparing against. These ETFs offer multifactor exposure to the U.S. large-cap and small-cap markets, respectively. Both have outperformed, likely due to metrics that screen out more of the "zombie companies" that broadly are in the Russell 2000 and which a passive index wouldn't weed out.

Investment Premise

Investing in IWN offers several advantages. First, it provides targeted exposure to a specific category of small-cap domestic stocks, namely those that are considered undervalued by the market. This can potentially result in higher returns as these stocks may be poised for growth.

Second, IWN offers a way to diversify a U.S. stock allocation and to tilt a portfolio towards value stocks. This can help reduce risk and improve returns over the long term.

Nonetheless, investing in IWN carries its own set of risks, as is the case with any investment option. The inherent stability of small-cap companies can be lower, making them more vulnerable to negative events, and their securities often exhibit higher volatility and reduced liquidity compared to their larger counterparts.

Conclusion

The iShares Russell 2000 Value ETF is a good blunt-force way of getting broad exposure to undervalued small-cap U.S. equities. I think it's worth considering if I'm right that this ends up being the year for value and small-caps compared to the exact opposite in 2023.

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