2023-05-16 16:23:48 ET
Summary
- iShares Russell 2000 Value ETF combines two investing styles: size and value.
- The IWN ETF has outperformed the Russell 2000 index since inception.
- It has lagged its competitors since June 2021.
- The weight of financials, especially regional banks, is a factor of risk.
- Most value indexes have two weaknesses.
This article series aims at evaluating ETFs (exchange-traded funds) regarding the relative past performance of their strategies and metrics of their current portfolios. Reviews with updated data are posted when necessary.
IWN strategy and portfolio
iShares Russell 2000 Value ETF ( IWN ) has been tracking the Russell 2000 Value Index since 7/24/2000. IWN has 1356 holdings, a 12-month distribution yield of 2.33%, and a total expense ratio of 0.23%.
As described in the prospectus by iShares , the underlying index measures the performance of a small cap segment of the US stock market. It includes companies with " lower price-to-book ratios, lower sales-per-share historical growth and lower forecasted growth " in the parent index Russell 2000. It represents about 52% of the Russell 2000 market value. Turnover in the last fiscal year is 35%.
IWN invests almost exclusively in U.S. companies (over 98% of asset value). The heaviest sector is financials (24.4%), followed by industrials (14%), consumer discretionary (11.7%), real estate (11.2%) and healthcare (10.9%). Other sectors are below 7% individually and 28% in aggregate. Banks come first among subsectors with a weight about 15%. Compared to its parent index iShares Russell 2000 ETF ( IWM ), the fund overweights financials, real estate and utilities. It underweights mostly technology and healthcare.
As expected, IWN is cheaper than its parent index regarding the usual valuation ratios, as reported below.
IWN | IWM | |
Price / Earnings TTM | 9.41 | 11.35 |
Price / Book | 1.24 | 1.85 |
Price / Sales | 0.85 | 1.1 |
Price / Cash Flow | 7.01 | 8.97 |
The top 10 holdings, listed in the next table with valuation ratios, represent only 5.1% of asset value, and the heaviest position weighs less than 0.6%. Therefore, the portfolio is well-diversified and risks related to individual companies are very low.
Ticker | Name | Weight (%) | P/E TTM | P/E fwd | P/Sales TTM | P/Book | P/Net Free Cash Flow | Yield% |
STAG Industrial, Inc. | 0.59 | 35.69 | 43.61 | 9.29 | 1.86 | N/A | 4.22 | |
Selective Insurance Group, Inc. | 0.58 | 24.90 | 16.19 | 1.69 | 2.54 | 8.24 | 1.16 | |
Light & Wonder, Inc. | 0.56 | N/A | 43.58 | 2.22 | 5.76 | N/A | 0 | |
Agree Realty Corp. | 0.55 | 37.32 | 38.17 | 13.22 | 1.31 | 39.49 | 4.36 | |
RBC Bearings, Inc. | 0.51 | 55.29 | 30.32 | 4.50 | 2.60 | 48.11 | 0 | |
Ryman Hospitality Properties, Inc. | 0.48 | 25.37 | 22.69 | 2.78 | 55.86 | 12.74 | 4.27 | |
Civitas Resources, Inc. | 0.47 | 4.22 | 7.12 | 1.53 | 1.09 | 6.85 | 7.83 | |
Terreno Realty Corp. | 0.47 | 23.50 | 48.53 | 17.36 | 1.91 | N/A | 2.58 | |
Triton International Ltd. | 0.46 | 7.71 | 8.89 | 2.61 | 1.93 | 4.22 | 3.36 | |
APi Group Corp. | 0.44 | 89.90 | 15.09 | 0.90 | 2.79 | 18.65 | 0 |
Since inception in July 2000, IWN has outperformed its parent index by 1% in annualized return, and it shows similar risk metrics (maximum drawdown and historical volatility).
Total Return | Annual Return | Drawdown | Sharpe ratio | Volatility | |
IWN | 484.28% | 8.05% | -61.55% | 0.41 | 19.78% |
IWM | 370.78% | 7.04% | -59.05% | 0.35 | 20.06% |
Data calculated with Portfolio123.
The next chart compares total returns of IWN, IWM and four small-cap value ETFs:
- iShares S&P Small-Cap 600 Value ETF ( IJS ), reviewed here ,
- Vanguard Small-Cap Value Index Fund ( VBR ), reviewed here ,
- Avantis U.S. Small Cap Value ETF ( AVUV ), reviewed here ,
- Dimensional U.S. Targeted Value ETF ( DFAT ), reviewed here .
Two other value funds are not represented on the chart, because they have the same underlying index as IJS:
The chart starts on 6/14/2021 to match all inception dates. IWN beats the Russell 2000 by a short margin, but it is the worst performer among the small cap value funds.
In the last 12 months, IWN has lagged all the ETFs in the list, including the benchmark.
Comparing IWN with my value benchmark
The Dashboard List is a list of 80 stocks in the S&P 1500 index, updated every month based on a simple quantitative methodology. All stocks in the Dashboard List are cheaper than their respective industry median in Price/Earnings, Price/Sales and Price/Free Cash Flow. After this filter, the 10 companies with the highest Return on Equity in every sector are kept in the list. Some sectors are grouped together: energy with materials, communication with technology. Real estate is excluded because these valuation metrics don't work well in this sector. I have been updating the Dashboard List every month on Seeking Alpha since December 2015, first in free-access articles, then in Quantitative Risk & Value.
The next table compares IWN performance since inception with the Dashboard List model, with a tweak: here the list is reconstituted once a year to make it comparable with a passive index.
Total Return | Annual Return | Drawdown | Sharpe ratio | Volatility | |
IWN | 484.28% | 8.05% | -61.55% | 0.41 | 19.78% |
Dashboard List (annual) | 1108.55% | 11.56% | -57.64% | 0.63 | 17.21% |
Past performance is not a guarantee of future returns.
The Dashboard List beats IWN by 3.5% in annualized return. However, the fund's price history is real, whereas the model is simulated.
Price to Book: a risky concept of value
I like the idea of mixing various ratios to rank value stocks. However, I think most value indexes doing so have two weaknesses, and IWN no exception. The first one is to classify all stocks with the same criteria. It means the valuation ratios are considered comparable across sectors and industries. Obviously, they are not: my monthly dashboard here shows how valuation and quality metrics may vary across sectors.
The second weakness comes from the price/book ratio (P/B), which adds some risk in the strategy. Historical data show that a large group of companies with low P/B has a higher probability to hold value traps than a same-size group with low price/earnings, price/sales or price/free cash flow. Statistically, such a group will also have a higher volatility and deeper drawdowns in price. The next table shows the return and risk metrics of the cheapest quarter of the S&P 500 (i.e., 125 stocks) measured in price/book, price/earnings, price/sales and price/free cash flow. The sets are reconstituted annually between 1/1/2000 and 1/1/2023 with elements in equal weight.
Annual Return | Drawdown | Sharpe ratio | Volatility | |
Cheapest quarter in P/B | 8.54% | -81.55% | 0.35 | 37.06% |
Cheapest quarter in P/E | 10.71% | -73.62% | 0.48 | 25.01% |
Cheapest quarter in P/S | 12.82% | -76.16% | 0.47 | 34.83% |
Cheapest quarter in P/FCF | 15.32% | -74.77% | 0.61 | 27.03% |
Data calculated with Portfolio123
This explains why I use P/FCF and not P/B in the Dashboard List model.
Takeaway
By investing in small caps with value characteristics, iShares Russell 2000 Value ETF combines two of the three factors of the original Fama-French model : size and value. It may be used as a long-term investment or as a part of a tactical allocation strategy, switching between investing styles (value/growth or small/large). IWN has beaten its parent index by 1% in annualized return since inception.
However, iShares Russell 2000 Value ETF has lagged its competitors since June 2021. Banks are the heaviest subsector (about 15%), which may explain underperformance in the last 12 months. It is also a factor of risk if the recent crisis in regional banks extends to a larger scale. Moreover, the underlying index has two fundamental weaknesses: ranking stocks regardless of their industries, and using price/book as a primary factor.
For further details see:
IWN: Regional Banks Are A Factor Of Risk