2023-03-09 06:08:38 ET
Summary
- iShares MSCI World ETF invests in stocks internationally within a variety of sectors.
- This ETF recently enhanced its United States-based holdings for their historical performance, but rate hikes could exploit this.
- URTH’s ability to grow and hedge inflation is limited, making this ETF rather mediocre and unworthy compared to alternatives.
I rate the iShares MSCI World ETF ( URTH ) a Sell. This ETF has consistently underperformed the broader market during the past few years. Therefore, as the months ahead could increase pressure on sales and deteriorate profit margins, this ETF could be in for a decline.
URTH has averaged 0.9% total annual returns during the last 10 years. This isn't especially high as this ETF focuses more on dividends rather than capital appreciation. Maintaining this could become difficult as price margins could decrease as elevated inflation may make it harder for this already expensive ETF to produce consistent and attractive returns. Dividends are the more primary focus of this ETF as it yields 1.58%, however, pressure on sales could force URTH to cut dividends. I don't believe it to be particularly safe to rely on this ETF for growth or dividends in the medium-to-long term.
In addition to its mentioned inferiority to the market, URTH has alternatives that could potentially offer similar or better returns for a lower price and reduced risk. A notable example would be the iShares Core S&P 500 ETF ( IVV ), which possesses a similar dividend yield and better performance record for roughly an eighth of the expenses.
Strategy
URTH tracks the MSCI World NR USD Index and uses a representative sampling technique, providing investors with a diversified composition of global equities. This ETF holds both growth and value stocks of varying market capitalizations. Companies with greater market capitalizations are given greater representation within this ETF, as URTH aims to provide investors with highly profitable and liquid stocks while also enhancing geographical diversification. URTH was launched by BlackRock Inc., and is currently managed by BlackRock Fund Advisors.
Holdings Analysis
URTH invests in many different sectors, making it very diversified in terms of sector allocations. The main sectors represented in this ETF are technology, financials, and healthcare, which altogether account for almost half of sector allocations. URTH invests no more than 20% in any sector, with technology accounting for 19%.
URTH allocates 16% to the top 10 holdings and 25% to the top 25 in an ETF of 1536 holdings, making this ETF somewhat top heavy. URTH also has more holdings than any ETF I have written about thus far. Despite being top-heavy, no single stock within URTH accounts for more than 5%. Apple ( AAPL ) is the top holding with a mere 4%.
URTH invests in stocks primarily within the United States, as 68% of holdings reside within the country. Non-United States locations within URTH primarily include Europe and East Asia, with virtually unnoticeable allocations to Canada and Australia. URTH has enhanced its holdings in United States stocks in recent years, as these stocks have outperformed compared to many foreign stocks. I believe this decision was well-informed, however, U.S. stocks currently being expensive could hinder growth and result in poorer performance within this ETF.
Strengths
URTH could provide investors with quality exposure to a number of sectors across the globe. Investors may simultaneously be spared of risks associated with volatility, as URTH is not particularly prone to frequent or momentous price fluctuations. This manifests through URTH's 5Y Beta of 0.98 and standard deviation of 24, almost exactly on par with the broader market.
This ETF is also quite liquid. URTH has an average daily share volume of almost 340,000 shares, which equates to over $37mm.
Weaknesses
URTH is marketed as a global ETF, but the majority of its shares reside in the United States. Though there isn't an immense lack of geographical diversification, investors should be aware that this ETF might not offer as much international exposure as scripted. Furthermore, the strong focus on the United States also plagues this ETF with possible currency risk associated with the U.S. dollar. For foreign investors, returns are converted into their native currency, which would then be worth less in the event that the U.S. Dollar gained value.
URTH is also somewhat costly, with an expense ratio of 0.24%. URTH is already at risk as the predictions for profit margins are rather negative, so higher expenses only further threaten returns. This could force many to neglect this ETF and instead invest in similar, cheaper alternatives like IVV.
Opportunities
Though the majority of this ETF's holdings reside in the United States, URTH also offers international influence within Europe. Increased energy trade between these two countries during 2022 facilitated growth and increased profits in both U.S. companies and European companies. Continuation of this relationship may increase the overall returns of URTH.
This proliferated relationship between the United States and Europe could also strengthen the U.S. Dollar. Though a stronger U.S. Dollar could be detrimental to foreign investors, it could also serve to fight inflation and enhance returns from United States companies within this ETF. This could empower this ETF as the majority of holdings are in the United States. I investigate this energy trade relationship in greater detail in my article on the iShares Global 100 ETF ( IOO ).
Threats
Rising yields in the United States could be detrimental to this ETF, as investors may start expecting greater returns from ETFs like URTH. Bond yields in the United States have been on the rise and have recently reached decade highs , indicating that investors may be increasingly resorting to equities and ETFs with greater expectations for returns. In this regard, URTH may not be able to meet such expectations, as its propensities for growth and outperformance are somewhat limited.
Current economic conditions could hurt the profitability of many United States companies and force them to accept a lower profit margin . Profit margins declining could eventually force URTH to reduce its dividends and enhance focus on sales to stay afloat. Given that URTH isn't particularly known for its sales metrics, this could make this ETF less attractive.
Conclusions
ETF Quality Opinion
URTH offers a decently diversified portfolio, however, the risks seem to outweigh the benefits in this ETF. Elevated interest rates combined with somewhat high expenses may make it difficult for this ETF to grow significantly in the medium term. I also believe URTH is mostly inferior to alternatives such as IVV.
ETF Investment Opinion
I rate URTH a sell, as I believe this ETF could have a difficult time generating quality returns amongst rate hikes and rising yields. I also believe these same events could hurt profit margins to the point where URTH could be forced to cut its dividend in order to allocate more towards expenses. During all of these processes, current holders could suffer significantly. Given this ETF's historical underperformance against the market and the prospect of declining profit margins, I would not consider this ETF a worthy investment at the moment.
For further details see:
URTH: Rising Yields And Declining Profit Margins Could Put This ETF In Danger