ILCG: Cautious On This Growth ETF

seekingalpha08-13

iShares Morningstar Growth ETF has outperformed the broader market in recent years due to growth stock bias.Economic uncertainties and high leverage levels create a mixed environment for stocks in the...

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href=https://seekingalpha.com/article/4713734-ilcg-cautious-on-growth-etf><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>iShares Morningstar Growth ETF has outperformed the broader market in recent years due to growth stock bias.Economic uncertainties and high leverage levels create a mixed environment for stocks in the...</p>\n\n<a href=\"https://seekingalpha.com/article/4713734-ilcg-cautious-on-growth-etf\">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":"LU0061474960.USD","symbol_name":"天利环球焦点基金AU 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valuation multiples and volatility may make it less attractive compared to peer group growth ETFs.   ahlobystov The iShares Morningstar Growth ETF (NYSEARCA:ILCG) is one of many ETFs with a bias toward growth stocks. As has been generally the case with these funds. ILCG has also outperformed the broader market over the past few years, as growth strategies have done better than those focused on value. However, growing uncertainties over economic growth and the interest rate path alongside elevated leverage levels driven by carry trade strategies have created a mixed environment for stocks in the short term. While I certainly have a bullish view on growth stocks for the long run, the current backdrop warrants a selective stance on stocks. That said, funds like ILCG may not be the best alternative for the time being, given an overall portfolio that trades at high valuation multiples and a track record of high volatility compared to the peer group. ETF Description & Highlights ILCG is an exchange-traded fund that offers exposure to large and mid-capitalization companies in the U.S. market with above-average growth characteristics. This fund tracks the performance of the Morningstar US Large-mid Cap Broad Growth Index. This index, designed by Morningstar, defines large and mid-capitalization stocks as the top 90% of market capitalization of publicly traded U.S. stocks. Each stock in this eligible universe is assigned growth and value scores. The growth score is calculated by the compounded average of historical and prospective earnings, revenue, cash flow, and book value growth, with 50% weighting for earnings growth and the remaining 50% weighting for the other three metrics together. The value score is calculated in a similar way, as the average of historical and prospective earnings, sales, cash flow, book value, and dividend yields, with 50% weighting for earnings yield and the remaining 50% for the other four metrics. Based on their growth and value scores, stocks are classified as having a pure growth, blend, or pure value orientation, with each range targeted to account for one-third of the large-mid market capitalization. As a final step, stocks defined as pure growth and blend styles are selected to constitute the index, where pure growth stocks are weighted based on market capitalization and blend stocks are weighted based on market capitalization multiplied by a tilt factor, ranging between 0 and 1, according to their growth score, in order to downplay the proportion of these blend-style stocks in the final index. As a result of the index methodology, ILCG's portfolio has 389 constituents as of August 7, 2024, with an average market cap of $442.6 billion and an allocation bias toward large companies, with 58.1% of the fund comprised of mega caps, 19.6% of large caps and only 21.8% of mid caps. ILCG's top ten holdings: Microsoft (13.7% of total assets), NVIDIA (10.9%), Amazon (7.1%), Apple (7.0%), Eli Lilly (3.0%), Meta Platforms (2.8%), Tesla (2.5%), Alphabet Class A (2.2%), Alphabet Class C (2.0%), and Visa (1.9%), make up 53% of the fund, with a strong bias toward technology and concentrated positions in high-growth names like Microsoft and NVIDIA.   Morningstar, consolidated by the author Source: Morningstar, consolidated by the author Below is a table that compares ILCG with a peer group of growth ETFs. The first three funds (IWF, IUSG, and SCHG) have primarily a large and mega cap allocation bias, with only roughly 10% invested in mid caps, while the second group (FAD, BUL, and QGRO) typically has a more diversified exposure and strategies that give more importance to cash flows, as is the case with BUL, or include value and quality measures like ROE, as occurs with FAD and QGRO.   Morningstar, consolidated by the author From a sector allocation perspective, ILCG's largest allocation is to the Technology sector, with 47.3% of total equities, followed by Consumer Discretionary with 13.9%, Healthcare 8.5%, Industrials 7.4%, Financial Services 7.2%, Communication Services 9.3%, Real Estate 2.1%, Consumer Staples 2.2%, Basic Materials 1.3%, Energy 0.6%, and Utilities 0.5%. When compared to the Russell 1000 index, represented in this analysis by the iShares Russell 1000 ETF (IWB), ILCG is heavily overweight in Technology (+17.2%) and Consumer Discretionary (+3.9%), reflecting outsized allocations in mega caps such as Microsoft, NVIDIA, Amazon and Tesla. On the other hand, ILCG is underweight primarily in Financial Services (-5.8%), Consumer Staples (-3.8%), and Healthcare (-3.7%), as the fund has no allocation in banks like JPMorgan, Bank of America and Wells Fargo, nor in major healthcare (UnitedHealth and J&J) and consumer staples companies (P&G, Walmart and Coca-Cola).   Morningstar, consolidated by the author A comparison with the peer group of growth ETFs shows ILCG with similar sector allocations with large caps growth ETF, with a relatively small underweight exposure to the Communication Services sector, driven by the lack of exposure in telecom players like Verizon, Comcast and AT&T. Meanwhile, ILCG's allocation differs from the mid-large caps growth ETFs, as these ETFs have on average an underweight exposure to technology and a tilt toward consumer discretionary and industrials, driven by their approach that adds value and quality metrics for stock screening.   Morningstar, consolidated by the author ILCG delivers on its goal of building a growth fund, as its earnings, sales, and cash flow growth measures outpace those of the broader markets, measured by the Russell 1000 and the S&P 500 indexes. Meanwhile, its valuation metrics are substantially above benchmarks, with price/earnings ratio of 31.1x, contrasting to 22.1x for the Russell 1000 index. ILCG's overweight allocation to mega caps such as Microsoft, NVIDIA, Amazon, and Tesla contributed to these higher valuations, which are exacerbated by an underweight exposure to banks and energy stocks, industries that typically trade at lower valuation multiples.   Morningstar, consolidated by the author ILCG shows growth measures similar to those of the peer group. However, its valuations are slightly higher when compared to large-caps growth ETFs, with a 6.4% premium for the price/earnings ratio. In contrast, the price/earnings ratio for the mid-large caps growth ETFs remains near the broader market levels at 21.0x, driven by the group's underweight exposure to the technology sector.   Morningstar, consolidated by the author Outperforming the Broader Market Alongside Growth ETFs ILCG has done very well over the past years, outperforming broader stock indexes during a period when growth stocks dominated the market. However, this came with higher volatility, as ILCG's beta and standard deviation metrics have been elevated as well. This has been the case for large-caps growth ETFs in general, as this peer group has outperformed the overall market and ILCG over time and still shows slightly lower volatility than ILCG. In contrast, there is a mixed picture when comparing ILCG with the peer group of mid-large growth ETFs. While ILCG delivered higher total returns, the peer group exhibited lower volatility measures and much better returns in 2022, a bear market year marked by overall negative returns.   Morningstar, consolidated by the author In summary, while ILCG and other growth ETFs have generally outperformed broader stock indexes, ILCG's track record is positioned in the middle of the pack among growth ETFs at best, as ILCG's higher valuation multiples and volatility reduce its attractiveness compared to the peer group.  That said, while growth funds, including ILCG, may continue to do well in the long run, ongoing macroeconomic uncertainties, including a risk of a hard-landing scenario and the path of interest rates, point to elevated volatility in the coming months. This outlook underscores my cautious view on ILCG for the time being, as investors are likely to limit the downside risk, favoring lower valuation and less volatile alternatives.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"-1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"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":"4.29.1","shortVersion":"4.29.1","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/2459935016"}