2023-08-07 08:39:30 ET
Summary
- The iShares Russell Top 200 Growth ETF has outperformed the S&P 500 since its inception.
- The underlying index of the ETF has a significant exposure to the tech sector, which has historically been crushed during market declines.
- The ETF has a measurable drag and higher volatility compared to the S&P 500, making it a risky investment.
Introduction
I have been researching ETFs quite a lot lately, even though they do not make up a sizeable part of my overall portfolio. I research them because I am intrigued by the possibility that there are potential indices that are better performers than the S&P 500.
Initially, I thought I had found one. It is the iShares Russell Top 200 Growth ETF (IWY). Based on back tested data, it has outperformed the SPDR S&P 500 ETF (SPY) since its inception by a sizeable margin.
Data (10/01/2009-07/30/2023) | Total Return | Annualized Return | Max Drawdown | Risk Statistics (MONTHLY Period) | ||
---|---|---|---|---|---|---|
Sharpe | Sortino | Standard Deviation | ||||
Russell Top 200 (IWY: USA) | 694.76% | 16.17% | -34.24% | 0.96 | 1.28 | 15.85% |
S&P 500 (SPY: USA) | 475.75% | 13.49% | -33.72% | 0.87 | 1.16 | 14.80% |
Data provided by FactSet
As one can see, IWY has realized a fine return since late 2009, and that makes it worthy of one’s attention as a potential investment. Before one buys, though, it is necessary to study past performance in detail.
The Underlying Index
As I have written in previous work, it is crucial to analyze the performance of the underlying index of an ETF. This is important because IWY did not exist during the 2008 stock market collapse, and consequently was not an available investment during the Tech Bubble. This is significant because according to its fact sheet , nearly 50% of its underlying investments are in the tech sector. If IWY had existed during those market crashes, one would have seen total losses of -36% and -57% respectively. For those who are not familiar with the Russell Top 200 Growth Index (RT200G), its criteria for inclusion are:
- Must be a member of the Russell 1000 Growth Index
- Member of the Russell 200 Index, which are the largest 200 traded companies based on market capitalization
- Higher price-to-book ratios
- Higher I/B/E/S forecast growth for the next two years
- Higher sales per share historical growth for the last five years
Currently, RT200G’s top five holdings are:
- Apple Inc. (AAPL)
- Microsoft Corporation (MSFT)
- Amazon.com, Inc. (AMZN)
- NVIDIA Corporation (NVDA)
- Tesla, Inc. (TSLA)
Morningstar does provide index information for both the S&P 500 Index, and the Russell Top 200 Growth Index. Using a total return method, these are the annualized results for both measures from 1986-2022.
Years (1986-2022) | RT200G | INX | Excess | |
Average | 37 | 10.60% (±22.72%) | 10.58% (±18.12%) | 0.02% |
Up Years | 30 | 19.56% | 17.87% | 1.69% |
Down Years | 7 | -20.78% | -15.87% | -4.91% |
Sharpe Ratio | 0.50 | 0.56 | ||
Sortino Ratio | 0.57 | 0.61 |
Data from Morningstar
It should be apparent that there is no significant difference between the two indices. Additionally, the Russell Top 200 Growth Index has higher volatility and has historically been crushed during those years of overall market declines. This alone should give one pause before they sell their SPY holdings, and buy IWY.
Those Pesky Fees and Drag
There exist expense ratios for IWY and SPY. IWY touts a minuscule 0.20% internal fee for its portfolio management. According to SPY’s fact sheet , it discloses an even smaller expense ratio at 0.0945%. The question becomes whether these differences matter. They do and there is the issue of drag.
When I analyze the actual differences in performance between each ETF and its underlying index, I find that each has a measurable drag. IWY has a -0.29% (±0.27%) difference between the performance of the ETF and the underlying index when I study each year from 2010 to 2023 (YTD). SPY, on the other hand, sees an investment drag of -0.12% (±0.30%) from 1994 to 2023 (YTD). If one incorporates these errors for the years when the ETFs did not exist and the actual calendar returns of each security, the risk data changes quite a bit. It changes so much, that one should readily see that they need to take a pass when it comes to whether or not to buy IWY.
Years (1986-2022) | IWY | SPY | Excess | |
Average | 37 | 10.30% (±22.78%) | 10.47% (±18.07%) | -0.16% |
Up Years | 30 | 19.25% | 17.71% | 1.54% |
Down Years | 7 | -21.04% | -15.87% | -5.17% |
Sharpe Ratio | 0.48 | 0.55 | ||
Sortino Ratio | 0.55 | 0.61 |
Data from Morningstar and FactSet
The Importance of Due Diligence
When I started this project, my original thesis was to show my readers that they should invest in RT200G instead of the S&P 500. If they had only looked at data since 2009, they would have been correct. The key is to research and analyze the performance of the underlying index before an ETF’s inception. How does it respond to market upheavals? How does it compare to the S&P 500 and its corresponding index funds? Do significant differences exist in their total returns? Is it worth the risk to invest outside the traditional market index? All of these questions have to be answered, or one might blindly find themselves in an investment that will underperform the overall market.
Given all of that, take a pass on investing in IWY. Either continue to invest in the S&P 500, or find a better-performing index.
For further details see:
ETF Comparison: IWY Or SPY?