IJR: Good Small-Cap Index ETF, But Better Choices Out There

seekingalpha05-11

Small-cap indexes like the Russell 2000 face challenges due to a growing number of unprofitable companies.Some funds avoid these issues through profitability screens. Chief among these is iShares Core...

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Chief among these is iShares Core...</p>\n\n<a href=\"https://seekingalpha.com/article/4691995-ijr-good-small-cap-index-etf-but-better-choices-out-there\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>IJR: Good Small-Cap Index ETF, But Better Choices Out There</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nIJR: Good Small-Cap Index ETF, But Better Choices Out There\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-05-11 03:38 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4691995-ijr-good-small-cap-index-etf-but-better-choices-out-there><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Small-cap indexes like the Russell 2000 face challenges due to a growing number of unprofitable companies.Some funds avoid these issues through profitability screens. Chief among these is iShares Core...</p>\n\n<a href=\"https://seekingalpha.com/article/4691995-ijr-good-small-cap-index-etf-but-better-choices-out-there\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0289739343.SGD","symbol_name":"SUSTAINABLE GLOBAL THEMATIC PORTFOLIO \"A\" (SGD) ACC","start_time":0,"source_url":"https://seekingalpha.com/article/4691995-ijr-good-small-cap-index-etf-but-better-choices-out-there","article_id":"2434689570","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1284113909/image_1284113909.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2434689570","pubTimestamp":1715369903,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Small-cap indexes like the Russell 2000 face challenges due to a growing number of unprofitable companies.Some funds avoid these issues through profitability screens. 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Chief among these is iShares Core S&P Small-Cap ETF.Although the IJR fund has outperformed since inception and trades with a heavily discounted valuation, some of its peers seem stronger, especially AVUV.   PM Images In a recent article, I argued that the Russell 2000 (RTY) and other well-known, small-cap, equity indexes and funds have a problem: too many unprofitable companies dragging down returns. Some small-cap indexes and funds avoid these issues through profitability screens, leading to stronger returns and outperformance relative to the Russell. The largest of these seems to be the iShares Core S&P Small-Cap ETF (NYSEARCA:IJR), which has outperformed the Russell 2000 and the S&P 500 (SP500) since inception and sports a cheap valuation to boot. Due to these issues, I thought to write a quick article on IJR. Although IJR seems like a strong investment, the Avantis US Small Cap Value ETF (NYSEARCA: AVUV) seems roughly similar to IJR, but with a much stronger, consistent performance track-record. As such, I would not be investing in IJR, and would choose AVUV instead. IJR - Basics  Investment Manager: BlackRock Expense Ratio: 0.06% Dividend Yield: 1.31% Total Returns CAGR 10Y: 8.76%.  IJR - Overview and Analysis Index and Portfolio IJR is an equity index ETF. It is a simple fund, tracking the S&P SmallCap 600, which aims to encompass / track the U.S. small-cap equity market. The index starts by selecting the 1500 largest U.S. equities subject to a basic set of inclusion criteria, including profitability, liquidity, and float. From these 1500 stocks, the smallest 600 are selected for index inclusion. These account for more or less the bottom 7% of the U.S. equity market, by market-cap. It does not include most large-caps, which account for most of the market, nor micro-caps.   S&P IJR itself ends up focusing on comparatively small companies, with a weighted average market-cap of $2.6B. The average S&P 500 company is more than 100x larger, with a weighted average market-cap of $278.8B.   Morningstar - Table by Author IJR is an incredibly well-diversified fund, with investments in 600 securities from all relevant sectors. Diversification reduces portfolio risk, volatility, and the possibility of substantial losses or underperformance due to an underperforming holding or sector, all significant benefits for the fund and its shareholders.   IJR Compared to the S&P 500, the fund is significantly underweight growth, tech, and communication services, due to the outsized size of mega-cap tech stocks. IJR does not invest in Apple (AAPL), Alphabet (GOOG) (GOOGL), or Microsoft (MSFT), so allocations to these industries are much lower. On the flip side, the fund is overweight several old-economy / value sectors, including industrials, real estate, and consumer discretionary. These sector tilts are quite common for dividend and value ETFs, although IJR is neither. Etfrc.com IJR's sector tilts impact the fund's performance, especially relative to the S&P 500. Expect the fund to underperform when tech outperforms, as was the case in 2023.   Data by YCharts Expect the fund to outperform when tech underperforms, as was the case in 2022.   Data by YCharts In my opinion, the above is neither a positive nor a negative, but an important fact for investors to consider. As many dividend ETFs have similar sector drifts to IJR, these investors are sometimes significantly underweight tech. Although this is not inherently bad, some investors might prefer more balanced industry exposures. For these, an allocation to the JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ: JEPQ) might make sense. I last covered JEPQ here. As a final point, IJR's portfolio is extremely different from that of the S&P 500, with no overlap between the fund and this index. As such, their performance could significantly differ moving forward. Bear in mind, this is much less of true of other large-cap U.S. equity funds, most of which share many holdings with the S&P 500. Etfrc.com Valuation Analysis One of IJR's key benefits is the fund's cheap valuation, with the fund trading at a sizable discount to the S&P 500 and mid-cap index ETFs.   Morningstar - Table by Author Importantly, IJR screens its holdings for profitability, so we can be certain that the figures above are accurate, and not significantly impacted by unprofitable companies. This isn't the case for many small-cap ETFs, which tend to invest quite heavily in unprofitable companies, exclude them from valuation metrics, and then post artificially low valuations. The iShares Russell 2000 ETF (NYSEARCA: IWM) does this, and most of its cheapness disappears once unprofitable companies are fully accounted for. IJR's valuation also seems cheaper, or less expensive, on a historical basis. Specifically, small-cap stocks are currently around 11% more expensive than 20y historical averages, while large-cap stocks are 34% more expensive. Although small-caps are not cheap per se, large-caps are much, much more expensive.   JPMorgan Guide to the Markets Growth stocks also look much more expensive than average, with value stocks trading at heavily discounted prices. Although IJR does not directly target cheap value stocks, in practice it does, through overweighting cheap sectors.   JPMorgan Guide to the Markets In any case, IJR's cheaply valued stocks could outperform moving forward, contingent on valuations normalizing. I don't personally see any short-term catalyst for this, but fundamentals do matter long-term. Performance Analysis IJR's performance track-record is reasonably good, but complicated. Returns since inception have been exceedingly strong, with the fund significantly outperforming the S&P 500. Data by YCharts IJR's long-term outperformance is almost entirely due to outperforming during the 2000s, more than two decades ago.   Data by YCharts IJR also performed well during the early 2010s, but much less than before.   Data by YCharts IJR has underperformed the S&P 500 since 2015, almost an entire decade. Underperformance has been significant, and somewhat consistent, with some exceptions.   Data by YCharts As should be clear from the above, IJR's performance, especially its relative performance, is moderately cyclical, with the fund seeing long, sustained periods of both outperformance and underperformance. I believe these to be based on long-term cycles of investor sentiment / preference, as well as changes in fundamentals and valuations. Small-caps significantly outperformed following the dot-com bubble bursting, and could outperform if tech valuations drop in the coming years. AVUV - Quick Comparison AVUV is one of my favorite equity ETFs, and quite similar to IJR. So, I thought to do a quick comparison between these funds. IJR focuses on U.S. small-cap equities. AVUV focuses on U.S. small-cap value equities. AVUV sports a cheaper valuation than IJR, as expected.   Morningstar - Table by Author Both funds have broadly similar sector tilts, being underweight tech and growth, overweight value and old-economy industries. Both funds consider profitability screens, so avoid the pitfalls associated with other small-cap funds, including those based on the Russell 2000. AVUV's performance track-record is much stronger, significantly outperforming IJR since inception, slightly outperforming relative to the S&P 500. Data by YCharts AVUV's investment manager has several other value ETFs, most of which have performed quite well these past few years, a strong indication that their strategies work. In my opinion, AVUV is a much stronger investment opportunity than IJR. AVUV does focus on a smaller, less diversified segment of small-caps than IJR, so there are real differences between these funds. Conclusion  iShares Core S&P Small-Cap ETF's strong strategy, cheap valuation, and long-term outperformance make the fund a buy. Nevertheless, AVUV seems like a broadly stronger choice.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":1,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.2","shortVersion":"4.24.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2434689570"}