IWV: Successfully Met Expectations, Valuation Is Also Down

~ by Snehasish Chaudhuri, MBA (Finance).

iShares Russell 3000 ETF (NYSEARCA:IWV) is an exchange-traded fund ("ETF") launched by BlackRock, Inc. (BLK) and is managed by BlackRock Fund Advisors. This ETF has 2625 equity shares that have been selected from a pool of 3000 equity shares that constitutes the Russell 3000 Index. The Russell 3000 index measures the performance of almost 98 percent of publicly-traded companies in the United States, and changes its composition in May and June every year. So, since my last coverage during April, 2022, the index has been revised twice.

Last time, I was bullish about IWV and found it to be extremely lucrative. I wanted to see how the fund has performed during the past one year, and is it still that attractive.

In my previous coverage, I was guardedly bullish (with a Hold rating) about IWS, and said:

Historically, the iShares Russell 3000 ETF has generated an average price growth between 15 to 30 percent over the past 10 years. This ETF has been successful in sailing through the US financial crisis, and covid-19 pandemic. In fact, this fund has been able to match the returns of the S&P 500 index over the years. I don't find any reason why this ETF will not be able to continue its historical growth, and generate a steady double digit total return over a longer term horizon. As a growth seeking investor, I’d certainly like to keep iShares Russell 3000 ETF in my portfolio of investments.

IWV’s Well Diversified Portfolio Delivers Strong and Steady Price Growth

iShares Russell 3000 ETF has assets under management over $11.2 billion, which it has invested in public equity shares of a whopping 2625 companies. Almost 60 percent of IWV's holdings are in stocks belonging to three sectors - information & communication technology, healthcare and financial. Managing equity shares of such a large number of firms, though challenging, provides this fund extreme levels of diversification. Despite investing in so many stocks, IWV has a relatively low expense ratio of 0.2 percent. This is primarily because it is a passive fund with an extremely low turnover ratio of 5 percent.

iShares Russell 3000 ETF has been paying regular quarterly dividends for the last 23 years. However, IWV’s annual yield has ranged between one percent to two percent for the past 10 years. However, it always recorded strong price growth. Since its inception, IWV generated an annual average return close to 8 percent, compared to 8.15 percent of its benchmark Index - Russell 3000 index. Over the past 10 years, IWV's market return was very healthy at 16.1 percent compared to 16.3 percent of its benchmark index. During 2016 and 2021, IWV’s annual average total return was quite healthy at 17.33 percent.

IWV’s Top Investments in Technology Stocks Generated Strong Price Growth

IWV’s top eight investments are all in the technology oriented businesses, namely Apple Inc. (AAPL), Meta Platforms, Inc. (META), NVIDIA Corporation (NVDA), Microsoft Corporation (MSFT), Amazon.com, Inc. (AMZN), Tesla, Inc. (TSLA), Alphabet Inc. Class C (GOOG), Alphabet Inc. Class A (GOOGL). It also has investments in Broadcom Inc. (AVGO), Adobe Inc. (ADBE), Accenture plc (ACN), Advanced Micro Devices, Inc. (AMD), Salesforce, Inc. (CRM), Comcast Corporation (CMCSA) Cisco Systems, Inc. (CSCO), Oracle Corporation (ORCL), Netflix, Inc. (NFLX), and Texas Instruments Incorporated (TXN). Together with investments in payment gateways - Mastercard Incorporated (MA), and Visa Inc. (V), IWV invested 31.4 percent of its assets in these technology oriented businesses. This emphasizes its outlook towards the technology sector.

What can be more satisfying for investors is that all these 20 technology oriented stocks generated positive returns during the past one year. NFLX and NVDA grew by almost 150 percent and 133 percent respectively. ORCL, AVGO, META and AMD grew by 82 percent, 61 percent, 55 percent and 49 percent respectively. Another five stocks - AAPL, MSFT, ADBE, CSCO, and CRM - generated price growth in excess of 20 percent. This is exceptional considering the fact that S&P 500 generated a price growth of 11.2 percent during the past one year. Price growth of iShares Russell 3000 ETF during the same period was 10.4 percent, which was marginally lower than S&P 500.

Investments in Healthcare & Financial Stocks Didn’t Deliver Satisfactory Results

Within the healthcare and financial sectors, notable investments were made in UnitedHealth Group Incorporated (UNH), Johnson & Johnson (JNJ), Eli Lilly and Company (LLY), Merck & Co., Inc, (MRK), Abbvie Inc. (ABBV), Pfizer Inc. (PFE), Thermo Fisher Scientific Inc. (TMO), Abbott Laboratories (ABT), Danaher Corporation (DHR) Bristol-Myers Squibb Company (BMY), JPMorgan Chase & Co. (JPM), Bank of America Corporation (BAC) Berkshire Hathaway Inc. Class B (BRK.B) and Wells Fargo & Company (WFC). Unfortunately, price performance of these stocks was not encouraging, as half of these stocks (JNJ, ABBV, BAC, PFE, ABT, DHR and BMY) generated negative price growth. Only four stocks - BRK.B, JPM, LLY and MRK were able to post a double-digit price growth during the past one year. However, compared performances in the average U.S. equity market, their price growth was very much acceptable.

Investment Thesis

The iShares Russell 3000 ETF generated an average price growth between 15 to 30 percent over the past 10 years. This ETF has been able to match the returns of the S&P 500 index over the years. During my last coverage I expected this ETF to generate a double-digit total return over a longer time horizon. The fund has been successful in achieving that during the past one year, despite the overall market performing poorly, and most funds generating negative returns. IWV’s portfolio recorded an average P/E of 18 and a P/B ratio of 3. The price multiples have come down if we compared to the same almost a year ago. Last time I was concerned about overvaluation, which is not the case this time. Moreover, the price multiples are lower than average.

There are enough reasons to chase the iShares Russell 3000 ETF - extremely strong diversification, strong and steady price growth, performances of technology stocks, and an option to benefit out of investing in the entire U.S. equity market. IWV’s top 20 investments in technology focused stocks have generated positive price growth and mostly in excess of 20 percent. Its low expense ratio and high assets under management provides further confidence to its investors. One year back I was bullish on this fund, and my position remains the same. In my opinion, long-term investors should consider building a long position in iShares Russell 3000 ETF.

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