2023-06-26 03:49:00 ET
Summary
- iShares Russell Top 200 Growth ETF offers strong performance characteristics, outperforming its peers with a 15.57% CAGR over the past decade.
- The growth vs. value debate shows that investing in both factors can yield strong long-term returns, with IWY being a good option for growth exposure.
- Despite its solid performance, IWY's current valuation appears expensive, making it a hold rather than a buy recommendation.
Thesis
iShares Russell Top 200 Growth ETF ( IWY ) is rather unknown amongst investors in the growth ETF space, as larger ETFs occupy the most attention. However, the fund offers solid performance characteristics, explained in this analysis. An updated look into the Growth vs Value factor debate is also provided.
Over the past 3 years, IWY has seen high volatility, leading a run-up in 2020 that was interrupted in early 2022 when a large contraction in the stock market adversely affected growth stocks. Since late 2022, IWY has been on a recovery trajectory, performing really well on a TTM basis.
IWY in a Nutshell
In an ETF universe filled with growth options for investors to choose from, IWY aims to stand out. The fund tracks the Russell Top 200 Growth Index, since September 22, 2009, when it was incepted, offering investors a targeted growth exposure toward large-cap companies. IWY maintains $6.98B of Assets Under Management, pays a 0.73% dividend yield and charges a relatively high 0.20% expense ratio. The fund's top holdings include mega cap names like Apple ( AAPL ), Microsoft ( MSFT ), Amazon ( AMZN ) and others.
Growth vs Value Revisited for 2023
It is known amongst investors and analysts that value stocks tend to outperform over long periods of time in the stock market. On average the value factor has outperformed, on average, 4.1% annually since 1927. This is a rather wide difference, especially when considering how it can compound investors' returns over time.
As shown in the chart below, while growth stocks tend to have some very strong years, sporadically over time, value stocks usually outperform marginally during normal times and they handily beat their growth counterparts during hard times for the market.
The past decade has deviated from historical value vs growth performance trends. Since 2013, large-cap growth stocks have recorded a CAGR of 14.6%, compared to value stocks' 9.1%. The growth stock run-up led to exceptional stock-market performance and excessive valuations in the stock market at the same time, inevitably causing (along with adverse macroeconomic shifts) the 2022 pullback. Even though the pullback was especially adverse for high-valuation growth stocks, the recovery appears to be on track.
In terms of valuation, the growth factor is, as expected much more expensive currently, trading at an average 23.8x P/E compared to the value factor's 14.1x and its own historic (20-year) average of 18.7x. In contrast, value stocks are only slightly overpriced, compared to 20-year average P/E multiples.
Despite what value and growth factor proponents will have you believe, it has, in fact, been historically proven that investing in both a broad market value and growth ETF will yield strong returns over the long term. Therefore, for an investor that looks to go beyond the simplest strategy of investing in the S&P 500 alone, adding a portion of the value and growth factor to his/hers portfolio can be hardly considered an unwise decision
Standing Out Among Peers
iShares Russell Top 200 ETF has seen strong return performance over the past decade, yet it is critical to examine how it compares to its peers, specifically large-cap growth ETFs, offered by the major ETF providers in the United States.
For this peer comparison, I employed the tools offered by Portfolio Visualizer to run a risk/return performance backtest on a group of 6 large-cap growth ETFs (including IWY), going back to late 2009, when IWY was incepted. The rest of the peer group includes Vanguard Growth ETF ( VUG ), iShares Core S&P U.S. Growth ETF ( IUSG ), iShares Russell 1000 Growth ETF ( IWF ), SPDR Portfolio S&P 500 Growth ETF ( SPYG ) and Vanguard Mega Cap ETF ( MGK ). Annual dividend reinvesting is assumed for the backtest.
After a first look at total returns over the 12+ years of the backtest, IWY appears to outperform all of its peers, returning $72,283 on a $10,000 initial investing balance. This represents an impressive 15.57% CAGR, significantly higher than the market's annualized return over the same time period. Volatility, as measured by standard deviation places IWY in the middle of the pack. In terms of risk-adjusted returns, IWY, once again outshines its rivals, carrying a very pleasing Sharpe ratio of 0.94 and a Sortino ratio of 1.56. All ETFs appearing in the comparison are strongly correlated to the broader market (S&P 500), as they display correlation over 0.90.
The differential of IWY's annualized performance compared to its peers is even more significant when considering that the ETF carries the highest expense ratio of 0.20%, relatively high for industry standards as well, while many of its peers charge expense ratios as low as 0.04%. Despite the expense ratio somewhat hurting annual returns, IWY's outperformance is an indication of its superior portfolio composition as well as of its ability to capture very effectively the overarching market direction over the past decade or so.
Valuation
When it comes to the valuation outlook of the ETF peer group examined above, IWY appears to be in the more expensive range. The fund carries a 28.76x P/E and 10.83x P/B multiple, both higher than the 20-year and current growth factor averages of (18.7x 20-year and 23.8x current P/E ratios respectively). The most expensive ETFs of the peer group appear to be Vanguard Mega Cap ETF and Vanguard Growth ETF with a P/E of 33.29x and 33.71x respectively.
On the less expensive side, SPDR's SPYG and Blackrock's IUSG carry multiples below the current valuation of the growth factor as a whole and rather close to historic averages as well.
In terms of dividend yield, all ETFs offer lower distributions to investors compared to the market average, while the more conservatively valued IUSG and SPYG pay the largest yields (1.04% and 1.07% respectively).
ETF.com
Overall, IWY's valuation appears expensive, spreading doubt regarding the ETF's ability to continue to outperform its peers and the market. Its dividend yield, is also slightly lower than expected, given its composition.
Final Thoughts
After all things are considered, IWY offers solid risk and return characteristics, especially compared to its peers. Its valuation is currently the only unattractive aspect of the fund, mainly attributable to the growth factor's overextension in the market over the past few years. For this reason, I would rate IWY as a hold.
For further details see:
IWY: Solid Performance At A Valuation Premium