IWY: The Risks Don't Justify Such An Aggressive Position

seekingalpha11-05

IWY is a concentrated ETF that distributes weights according to growth indicators.This seems to be a relatively cheap fund to hold and has done very well in the past when it comes to its performance....

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Its assets under management are $12 billion, it charges an expense ratio of 0.20%, and during its last fiscal year, its turnover ratio was 11%. The index that it tracks starts from an available universe determined by the Russell Top 200 Index (parent index) and then determines the weights according to each holding's P/B ratio, the sales per share historical growth, as well as the forecast growth relative to the rest of the securities within the parent index. Such a fund can be useful during periods when the growth potential outweighs the risks as it offers exposure to those stocks that are most likely to outperform. Unfortunately, this is not one of those periods and investors should be cautious as this ETF's holdings are particularly expensive right now. The Bullish Thesis First, let's start with a bullish thesis that uses the upcoming cuts by the Fed as a potential driver of stock market gains and the corporate earnings growth as support for a strong trend of positive market sentiment. The general idea is that lower interest rates are going to have an impact on future profitability and a more indirect impact on demand for equities as investors become more risk-tolerant. A more specific driver is the large exposure to the technology sector that this fund has; 53.17% is allocated to tech stocks which means that if certain risks don't materialize such a large exposure could help the fund outperform the market. Besides, innovation is what partly drives growth in the long term and, as it seems lately, in the short term as well. The Risks The problem here is that the risks make this bullish thesis weak. First, the latest FOMC statement mentions that the Fed is going to continue conducting quantitative tightening and during the last press conference, Powell justified it by saying that you can have the balance shrinking and cut rates at the same time as this represents a form of normalization. Considering that reserves are abundant, as he put it, this actually makes sense. This brings us to the major risk; with liquidity only being slowed down and Powell talking about normalization that could both mean a new neutral rate level and a lot of work in regard to removing this high level of liquidity from the system. This implies a partially restrictive stance on growth and with the market hitting new highs and its current valuation I just don't see how it's possible that the market is pricing that in. Data by YCharts More specifically IWY's valuation is much higher as represented by a P/E ratio of 44.39x and a P/B ratio of 14.92x. This ETF also has a concentration risk related to that Technology sector exposure we mentioned above. You should also know that Apple Inc. (AAPL), NVIDIA Corporation (NVDA), and Microsoft Corporation (MSFT) each account for about 13% of the portfolio, which makes the concentration risk that funds like the SPDR S&P 500 ETF Trust (SPY) introduce very mild in comparison. Performance We can now gain some insights by examining its performance against relevant alternatives. First, the excess returns when compared to SPY must have many risk-tolerant investors interested in this fund excited: Data by YCharts However, context matters. The fund was launched only a few months after the Great Recession ended; around the start of the longest bull market in the U.S. history of nearly 11 years, supported by near-zero interest rates, and the Fed aggressively injecting liquidity into the system. Therefore, the ETF's concentration and growth bias can deliver excess returns but a strong start and a long bull market help it significantly. The only certain thing here is that the future will be different, so bear all that in mind. This also adds context to its performance relative to similarly concentrated funds; one with no bias and one with a value one: Data by YCharts Additionally, observe the very modest excess returns of the IWL when compared to how SPY performed, as shown earlier. The growth bias appears to be much more important than the diversification level. However, we should not underestimate concentration as a factor. IWY outperformed similar growth funds over the years: Data by YCharts Last, I want you to take a moment and see how its 2022 drawdown after the Fed started raising the Federal Funds rate hasn't been much more severe than what SPY experienced, but its outperformance since March 2022 has been impressive: TrendSpiderTrendSpider  Nevertheless, this is not yet the time to be aggressive, and this ETF is too aggressive. It's best to monitor the economy and the markets and keep this one in mind when the valuation looks more attractive or the risks less threatening.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"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":"4.29.2","shortVersion":"4.29.2","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/2481843555"}