The ‘i’s’ Have it, and It’s Not All About Size

Contrary to juvenile jokes everywhere, sometimes the best things come in small packages.

Caviar, Cognac and, most relevant to this e-letter, small-cap exchange-traded funds (ETFs). (Not that you can’t enjoy the other two while reading this e-letter.)

So, as the Federal Open Market Committee struggles with some larger issues at present, let’s dive into the advantages of small-cap ETFs. These ETFs allow an individual to purchase a diversified portfolio of smaller companies at a reasonable price. Further, instead of doing extensive research into one small company, small-cap ETFs do the work for you and can offer exposure to multiple small companies in a broader portfolio. Often, these ETFs can generate high returns as they grow and become larger businesses.

Now, let’s get down to business and explore why the “i’s” have it, and it’s certainly not all about size when talking about the iShares Russell 2000 Value ETF (IWN). IWM is a passively managed ETF that provides broad exposure to the Small-Cap Value segment of the U.S. equity market. In fact, its wide array of holdings makes it one of the most diversified funds in the segment.

As a noteworthy aside, IWM does indeed dip its toe into micro-cap territory, which can make it a bit of a riskier play. But micro-cap stocks are a valid and potentially appealing approach to small-caps. With this said, IWM is on par with its counterparts on all other fronts, and its varied approach may be of intrigue to interested investors.

Unlike other ETFs in this space, IWN has amassed assets of over $11.18 billion, making it one of the largest ETFs attempting to match the Small-Cap Value segment. Created in late 2000 and sponsored by Blackrock, IWM, as of this writing, allows investors access to 2,015 small-cap domestic stocks in a single fund. The ETF can be useful for investors looking to diversify their U.S. value stock allocations and generate long-term portfolio growth.

According to Zacks Investment Research, Inc., IWM has a Rank of 1 — making it a Strong Buy. The ETF’s ranking is based on expected asset class, return, expense ratio and momentum, along with other factors. Nasdaq.com calls IWN “an excellent option for investors seeking exposure to the Small-Cap Value segment.”

IWM has net assets of $48.91 billion and a weighted market cap of $2.98 billion. Furthermore, it has a 12-month trailing dividend yield of 2.24% and an expense ratio of 0.19%, which makes it reasonably priced for its strong potential upside.

Courtesy of stockcharts.com

As is apparent from the chart above, IWM is no less vulnerable to market volatility than any other fund or stock. However, as it is so broadly diversified, IWM has had the strength to move out of any serious downward spikes. Currently, the fund is trading above its 50- and 200-day moving averages. Furthermore, it has an appealing median daily volume of $5.37 billion.

IWM’s heaviest holding allocation is in the financial sector, making up about 25% of its portfolio, with Healthcare and Industrials helping to round out its top three holdings’ categories.

Its top 10 holdings account for roughly 4.97% of its total assets under management and include Super Micro Computer, Inc. (SMCI), 0.47%; ShockWave Medical, Inc. (SWAV), 0.44%; Inspire Medical Systems, Inc. (INSP), 0.37%; Apellis Pharmaceuticals, Inc. (APLS), 0.36%; EMCOR Group, Inc. (EME), 0.35%; Saia, Inc. (SAIA), 0.34%; Iridium Communications, Inc. (IRDM), 0.34%; Karuna Therapeutics, Inc. (KRTX), 0.33%; Texas Roadhouse, Inc. (TXRH), 0.32%; and Celsius Holdings, Inc. (CELH), 0.31%.

In summary, the iShares Russell 2000 Value ETF is one of the largest ETFs in its space. It offers interested investors great exposure to a broad range of small-cap U.S. companies and can potentially generate long-term profits. While there is risk with investing in small-cap ETFs, any good investor knows that where there is risk, there is reward.

As usual, interested investors should conduct their due diligence and decide whether the fund is suitable for individual investing goals. And as T.E. Lawrence, a.k.a. “Lawrence of Arabia,” once said, “Big things often have small beginnings.”

I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You may just see your question answered in a future ETF Talk.