IVW: Bullish In Growth But Not The Best Choice

In 2023, the US equity market had surprised many with much better-than-expected returns driven by optimism in macroeconomics outlook, as well as the ongoing AI frenzy which drove up the performance of many large technology firms. While the S&P 500 performed well year-to-date, many investors began to realize the high concentration risk it possessed. An analysis from Morningstar below demonstrates that almost all US market returns was produced by several large tech names in 2023, as compared to a much smaller proportion in 2020.

Therefore, it is interesting to look into one of the funds which aim to capture all of those companies which have provided significant returns to the US market. The iShares S&P 500 Growth ETF (NYSEARCA:IVW) “seeks to track the investment results of an index composed of large-capitalization U.S. equities that exhibit growth characteristics”. As a result, it is dominated by technology, healthcare and consumer cyclical sectors with technology being almost 40% of the entire fund weight.

Meanwhile, it also has high concentration risk (as expected), where the top 10 holdings represent close to half of the entire fund’s weight. Even AAPL alone is 14% of the entire fund itself. As a comparison, the top 10 holdings of SPY is ‘only’ about 30% of the fund. Hence, IVW is undoubtedly the more concentrated option.

Performance Review

High risk generates higher expected return. The IVW did unsurprisingly outperform SPY given its more concentrated weights towards the big tech firms which performed very well this year. However, it underperformed its growth peers which tracked different indices. The infamous QQQ outperformed IVW with its greater overweight to the technology sector, representing 49% of the fund’s weight. VUG and IWF are also similar to QQQ with higher overweight to the technology sector than IVW, but they also have larger overweight to communications instead of health care.

Over the longer run since January 2021, SPY actually outperformed all growth ETFs. IVW remains as the laggard to its peers, underperforming all of the other ETFs.

Comparing the returns of IVW across the top sectors would explain more of its underperformance, as technology performed significantly better than the fund itself, as well as the other sectors heavily held by IVW such as health care and consumer cyclicals.

Risk Analytics

Risk figures seem to be very well correlated to a fund’s weight in the technology sector, as IVW has lower annualized volatility than its peers but higher than SPY in general. The 5Y bollinger chart below also visualizes the price volatility of IVW on a 3-month rolling basis, where it has been trading below the rolling mean – signifying a potential underweight over recent months.

Applying the Fama-French 3 Factor Model, 66% of IVW active risk relative to SPY can be attributed to value premium, where IWN favors equities with growth stocks with higher book-to-market ratios. This indicates that the ETF is exactly doing what it should do.

Relative to the broad market (SPY), IVW has underperformed since early 2023, as its rolling-alpha has emerged to the positive territory and stayed flat since. Meanwhile, the rolling-beta chart demonstrates the sensitivity of IVW over SPY, which has been mostly trading below 1 and reaching 0.8 lately. This indicates that IVW is less sensitive to price movements in the broad market as 1 point move in SPY will only lead to 0.8 point move in IVW.

This is indeed interesting as growth stocks are usually more volatile, hence having higher beta values. But this also shows that growth ETF does have better risk-adjusted returns than the overall US market at the moment.

Fundamental Deep Dives

Despite IVW being the growth ETF, it actually has a lower P/E ratio than SPY as IVW is 21x while SPY is 23x. This indicates that growth stocks are actually not quite overvalued as many would think. While there is a significant range in valuation across IVW top holdings, multiples do look sensible in overall adjusting with their respective growth potential.

Looking across the profitability metrics, they are also profitable with decent return on equity and significant EBITDA margins for few. However, revenue growth fell or stayed low for several companies which include AAPL, NVDA, and XOM. The falls are due to some record high revenues recorded by NVDA and XOM during the AI and energy rally respectively.

Analysts price targets are relatively bullish, especially towards the big tech names such as AMZN, GOOGL, and MSFT. Several companies which have seen recent spikes in stock prices such as NVDA and TSLA have relatively modest target prices.

Conclusion

The growth ETF has demonstrated its characteristics as a great alternative to SPY with better risk-adjusted returns. Higher concentration risk may be worth highlighting but it has also now become the trait of the broad market. The fundamentals of growth stocks held within the funds also look robust and sensible. However, IVW may not be the best ETF for US growth exposures as many of its peers actually have better track record than itself. As an investor who seeks for growth exposure usually has greater risk appetite, other growth ETFs with bigger bets on technology names, such as QQQ, may be more suitable.