Standard & Poor’s foresees improving real gross domestic product (GDP) growth in 2011, and also foresees gains in the broader U.S. stock market following a 14% gain (as measured by the S&P 1500) in 2010. How best to play these expectations? The academic literature on investing routinely extols the benefits of diversification. One relatively efficient way for investors to gain broad investment exposure to the U.S. stock market is through the iShares Russell 1000 Growth Index Fund (IWF), which sports S&P’s highest overall ETF ranking of “overweight”. Standard & Poor’s believes IWF features attractive underlying holdings, a large-cap growth focus, and solid exposure to sectors that S&P’s Investment Policy Committee believes will outperform over the next 12 months.
In selecting this month’s Featured ETF, S&P screened for equity ETFs that scored positively for performance analytics, risk, and cost. The screening criteria also included a requirement for a minimum average volume of 1,000,000 shares per day (to focus on ETFs with strong liquidity), and a large cap growth orientation. Putting in these criteria reduced the overall equity ETF universe from more than 500 names to a mere eight ETFs.
Based on an evaluation of the underlying ETF holdings, Standard & Poor’s classifies IWF as a large-cap growth ETF as approximately 76% of its holdings as of November 30 qualify as large-cap. S&P thinks it is appropriate to put a large-cap-focused equity ETF like IWF into the core part of an investor’s portfolio. The security has 626 holdings, total assets of $12.6 billion, and average trading volume in excess of 2.5 million shares per day, as of January 12, 2011.
Like many of today’s equity ETFs, IWF is aimed at providing investment returns that are generally similar to those of the stocks in an equity index. In the case of IWF,
BlackRock iShares says that this ETF is designed to track those stocks in the Russell 1000 Growth Index. This ETF has an inception date of May 22, 2000 and it has 217.4 million shares outstanding. The gross expense ratio for EWL is 0.20%.
Standard & Poor’s believes that from a sector rotation standpoint, growth-oriented sectors are likely to be in vogue in 2011. As of January 12, 2010, Standard & Poor’s Investment Policy Committee (IPC) had an overweight opinion on the industrials, information technology, and materials sectors, with underweight opinions on the health care and utilities sectors. Standard & Poor’s Chief Investment Strategist Sam Stovall expects the U.S. economy to gradually recover in 2011, contributing to a projected 13% rise in operating earnings per share (EPS) for the S&P 500, as a result of improving top-line growth, cost efficiencies, and share buybacks. S&P Economics also expects international growth to be buoyed by an estimated 9% gain in real GDP in China. S&P favors the industrials group, due to evaporating risk of a global double-dip
recession, a projected weakening of the U.S. dollar, and strong technicals. S&P also favors the information technology group, as low valuations, healthy demand, and strong balance sheets are catalysts for share price gains. Finally, S&P recommends the materials sector because increasing global economic momentum should drive EPS growth and commodity prices.
An investment in IWF, judging by the sectors it focuses on, is by extension a growth-oriented play. Based on holdings data as of January 13, the combination of industrials, information technology, and materials (S&P’s three overweight-recommended sectors) comprise 49% of total assets. By contrast, the underweight-recommended health care and utilities sectors comprise just 10% of total assets in this ETF. Looking at individual industries, the top five industries are computer hardware, integrated oil and gas, systems software, IT consulting and other services, and semiconductors; however, given the high number of holdings, these five industries comprise just 25% of IWF’s total assets, illustrating the extent to which the security is broadly diversified.
As of January 12, 2011, amongst the top 10 holdings (also 25% of total assets) S&P Equity Research ranks five names as “strong buys”, two as “buys” and three as “holds”. In addition, S&P sees positive attributes for the security from a technical perspective. Overall, these factors lead to an “overweight” rank of the security from a performance perspective.
As for risk considerations, S&P ranks IWF with an “overweight”, noting that IWF benefits from an above-average score for the proprietary S&P Quality Rank, as well as for standard deviation. (The S&P Quality Rank assesses the growth and stability of a company’s earnings and dividends over the past 10 years.) S&P has neutral scores for the proprietary S&P Credit Rating and S&P Qualitative Risk Assessment.
As for cost factors, IWF’s ranking in this category – “overweight” – reflects attractive scores on gross expense ratio and on bid-ask spread, but has a neutral score on its price to net asset value.
In conclusion, IWF is one of approximately 134 equity ETFs on which S&P had an overall “overweight” ranking on January 12, 2011. S&P believes IWF has compelling characteristics as it relates to performance, risk, and cost factors.
