2023-09-28 05:16:10 ET
Summary
- IMCG generates low yield, but strong total return both over the short-run and in the long-run. It posted double-digit annual total returns over the past 10 years.
- More than half of IMCG’s assets are invested in industrial and ICT sectors. A large part of its investments is in the companies working on cloud technology.
- IMCG has a balanced mix in its investments in usual stocks that most funds invest in, as well as stocks that operate in perceived high-growth technologies.
- IMCG is a good option for long-term growth investors. But, it is trading almost at par with its NAV and its price multiples don't suggest it to be undervalued.
~ by Snehasish Chaudhuri, MBA (Finance)
BlackRock's iShares Morningstar Mid-Cap Growth ETF (IMCG) is an exchange traded fund that invests in growth stocks of mid-cap companies operating across diversified sectors. This fund generates low yield, but has posted strong total return both over the short-run and in the long-run. IMCG's annual total returns over the past ten years have averaged over 10 percent. It seems that IMCG is having an appropriate valuation, given its price multiples are almost equal to that of the benchmark index, and are slightly lower than its peers. The fund has lost 10 percent of its value over the past two months, which has attracted lots of attention to this otherwise steadily growing mid-cap fund.
IMCG Invests in Above-Average Growth Stocks and Generates Strong Total Returns
Managed by BlackRock Fund Advisors, iShares Morningstar Mid-Cap Growth ETF seeks to track the performance of Morningstar US Mid Cap Broad Growth Index. The fund picks stocks in such a way that it represents the very essence of benchmark index in terms of geographical and industrial allocation, and weightage towards all these stocks. This index is composed of mid-cap U.S. equities that exhibit above-average growth characteristics as determined by Morningstar, Inc.'s proprietary index methodology. Like most mid-cap funds, IMCG's portfolio will have stocks with low levels of pay-out, and IMCG too focuses heavily on industrial and information & communication technology sectors (ICT). More than half of its assets are invested in these two sectors.
iShares Morningstar Mid-Cap Growth ETF was formed on June 28, 2004 and has been paying consistent quarterly dividends since then, but with a very low yield. However, it generates strong total returns over the long run. Total return over the past 12 months has been almost 13 percent. Over the past 10 years, annual average return stood at 10.2 percent . During 2016 & 2021, average total return was almost 21 percent. The fund has an investable asset of $1.54 billion, and has an expense ratio of 0.06 percent. It has a turnover ratio of 43 percent. The fund is currently trading almost at par with its net asset value.
IMCG Invests Both in Usual Stocks, And in Stocks Believed to be Future Growth Generators
What I liked about the composition of iShares Morningstar Mid-Cap Growth ETF, is that this fund has a balanced mix in its investments in usual stocks that most funds invest in, as well as some unusual stocks, that operates in areas which are believed to be the growth generator in the coming years. IMCG's industrial portfolio includes traditional manufacturing companies like supplier of aircraft components - TransDigm Group Incorporated ( TDG ), less-than-truckload ((LTL)) motor carrier - Old Dominion Freight Line Inc. ( ODFL ), manufacturer of electronic instruments and electromechanical devices - AMETEK, Inc. ( AME ), manufacturer of motion and control technologies and systems - Parker-Hannifin Corporation ( PH ), industrial automation & digital transformation solution provider - Rockwell Automation, Inc. ( ROK ), etc.
At the same time, major investments of iShares Morningstar Mid-Cap Growth ETF also include stocks with perceived high growth potential such as online auction and vehicle remarketing service provider - Copart, Inc. ( CPRT ), integrated human capital management solution firm - Paychex, Inc. ( PAYX ), data analytics solution provider in the insurance market - Verisk Analytics, Inc. ( VRSK ), data processing & outsourcing service provider - Broadridge Financial Solutions, Inc. ( BR ), labor & manpower solution firm - Equifax Inc. ( EFX ), etc.
Cloud-based Stocks Have Significant Presence within the ICT Investments of IMCG
Similar trend is visible within IMCG's major investments in the information & communication technology sector. There is a huge emphasis on cloud technology. CrowdStrike Holdings, Inc. ( CRWD ) Datadog, Inc. ( DDOG ), The Trade Desk, Inc. ( TTD ), Splunk Inc. ( SPLK ), MongoDB, Inc. ( MDB ), Workday, Inc. ( WDAY ) and HubSpot, Inc. ( HUBS ) operate on various cloud-based solutions that include cloud-delivered protection, cloud database and CRM solutions. Data storing in the cloud is easier, cheaper, faster and also quite safer. Cloud-based applications, Business analytics, CRM softwares and services are also getting popular. As more and more business houses are adopting cloud technology in order to store huge volumes of data, demand for cloud computing is only going to increase in the coming days.
Again, stocks belonging to system & application software developers as well as communication technology providers, also find place among the top holdings of IMCG. These include developer of application software - Atlassian Corporation ( TEAM ), IT Consulting Services firm - Gartner, Inc. ( IT ), distributor of discrete hardware and software products - CDW Corporation ( CDW ), engineering simulation software and service provider - ANSYS, Inc. ( ANSS ), counter terrorism investigation & operation related software developer - Palantir Technologies Inc. ( PLTR ), and developer of analytic, software, and data decisioning technologies - Fair Isaac Corporation ( FICO ). Stocks of a few semiconductor businesses such as Marvell Technology, Inc. ( MRVL ), NXP Semiconductors N.V. ( NXPI ), Microchip Technology Incorporated ( MCHP ) also feature among top investments of iShares Morningstar Mid-Cap Growth ETF.
IMCG is One of the Best Mid-Cap Funds Available to US Growth-Seeking Investors
Some similar type of diversified mid-cap funds include iShares Morningstar Mid-Cap ETF ( IMCB ), First Trust Mid Cap Growth AlphaDEX Fund ETF ( FNY ), iShares Russell Mid-Cap Growth ETF ( IWP ) Vanguard S&P Mid-Cap 400 Growth Index Fund ETF Shares ( IVOG ) and Hartford Longevity Economy ETF ( HLGE ). I find that among all these funds, the Morningstar funds (IMCG and IMCB) have a much higher asset base and hold a much higher number of stocks in their portfolio. These funds also have a relatively low turnover ratio.
Average Daily Share Volume of iShares Morningstar Mid-Cap Growth ETF is five to ten times higher than that of other funds. So, IMCG attracts investors much more than its peers. IMCG's price growth over the past 10 years has been much higher than its peer funds. During the past year also, IMCG recorded a price growth which is among the top half of all these funds. Yield, as usual, is quite low for all the mid-cap funds. Overall, IMCG is one of the best performing diversified mid-cap funds available to growth-seeking investors.
Investment Thesis
iShares Morningstar Mid-Cap Growth ETF generates low yield, but has posted double-digit annual total returns over the past ten years. The fund as well as its benchmark index select equities that primarily exhibit above-average growth characteristics. IMCG focuses heavily on industrial and ICT sectors and more than half of its assets are invested in these two sectors. A large part of IMCG's major investments in the ICT sector is on the companies working on cloud technology. Data storing in the cloud is easier, cheaper, faster and safer. As more and more companies are adopting cloud technology in order to store data, demand for cloud computing is going to increase in the coming days.
What I liked about IMCG's portfolio is that this fund has a balanced mix in its investments in usual stocks that most funds invest in, as well as some unusual stocks, that operates in areas which are perceived to be generating high growth in the future. I also found IMCG to be one of the best performing mid-cap funds. 10 percent price loss over the past two months makes this fund quite attractive. But, I don't think it's the right time to accumulate further units of this stock, as the fund is trading almost at par with its net asset value. IMCG's price multiples also don't suggest that the fund is undervalued. Thus, for now, I'd assign a hold rating on iShares Morningstar Mid-Cap Growth ETF.
For further details see:
IMCG: A Mid-Cap Fund With A Balanced Mix Of Investments