IUSG ETF: Choose Other Large Growth Funds Instead (NASDAQ:IUSG)

introduction

About a year ago, we wrote an analysis of the iShares Core S&P US Growth ETF (Nasdaq: IUSG). At the time, we had a positive view on IUSG given its exposure to technology stocks It is expected to result in better growth than the broader market. However, is this really the case if we compare it to other growth funds? In this article, we will present our analysis and recommendations.

Overview of ETFs

IUSG holds a portfolio of large- and mid-cap growth stocks in the United States. The fund primarily selects growth stocks from the S&P 500 (large-cap) and S&P 400 (mid-cap) indexes. The result is a portfolio of about 480 large- and mid-cap stocks. IUSG has been performing well recently. In fact, the price of its fund has now surpassed the previous peak reached in late 2021 and early 2022. The fund has significant exposure to technology stocks and is likely to Continuing to outperform other broader market funds. However, its performance has lagged other large growth funds. This was most likely due to the fact that it also included mid-cap stocks. Therefore, we believe it is better to own funds that focus only on large-cap growth stocks.

Fund analysis

The IUSG has now surpassed the previous peak reached in early 2022

IUSG has performed very well since hitting a cyclical low in October 2022. Since that low, the fund has delivered a price return and total return of 52.1% and 54.1%, respectively. This performance was better than that of the broader market, the S&P 500, which delivered a price return and total return of 50.0% and 47.3%, respectively. IUSG has performed well with its fund price now surpassing the previous high reached in late 2021 and early 2022.

IUSG’s exposure to technology has increased significantly over the past year

As we analyzed last year, IUSG’s exposure to technology stocks was very high. In fact, when we wrote the article last year (June 2023), the IT sector already represented about 35.3% of its total portfolio. This high exposure has not diminished in the past year. Instead, IUSG’s exposure to the IT sector rose significantly to 46.7% today. This represents approximately half of IUSG’s portfolio. In contrast, the S&P 500’s exposure to technology stocks is only about 30.7%. IUSG’s increased exposure to technology stocks is very beneficial as we believe technology stocks will continue to benefit from several important technology megatrends. These trends include artificial intelligence, augmented reality/virtual reality, autonomous vehicles, cloud computing, etc. Therefore, we continue to believe that IUSG’s exposure to technology stocks means that the likelihood of it continuing to outperform the broader market, i.e. the S&P 500, is quite remote. high.

However, its performance has lagged other large growth funds

Given IUSG’s growth characteristics, one would expect it to at least match the performance of other similar growth funds. However, this seems not to be the case. Below is a chart comparing IUSG’s performance to several large-cap growth funds: Vanguard Growth ETF (VUG), Schwab US Large-Cap Growth ETF (SCHG), and Invesco Large Cap Growth ETF (PWB). As can be seen in the chart below, IUSG’s total return of 533.5% has been lower than other large growth funds since 2010. As the chart below shows, the best performer was VUG’s return of 691.3% followed by SCHG’s 654.1%.

We know that IUSG changed its tracking index in 2017. So, it’s probably best to just look at the total return since 2017. However, as the chart below shows, the fund’s total return was still lower than the other three funds.

The inclusion of mid-cap stocks may underperform other growth funds

Why has IUSG lagged behind the performance of other funds? We believe one of the main reasons is the fact that IUSG includes not only large-cap stocks, but also mid-cap growth stocks. In fact, large-cap stocks represent only about 86% of its total portfolio. This is different from the other large-cap growth funds we compared in the previous section. Mid-cap stocks tend to have lower returns than large-cap stocks over the long term. As can be seen in the chart below, the S&P 500 (large-cap) has outperformed its mid-cap counterpart, the S&P 400, by a wide margin in the past 10 years. Therefore, this may be the main reason for IUSG’s poor performance in the past.

Large-cap growth stocks are now expensive

Last year, when we examined the valuation of large-cap growth stocks, we noted that these stocks had an average forward P/E ratio of 21.4 times, and that they were not expensive relative to their much higher valuation during the pandemic. Here, we will check the average valuation of large-cap growth stocks again. Below is a chart showing the valuations of growth stocks and value stocks in the S&P 500 in the past three decades. As can be seen in the chart below, the current average forward P/E ratio of 27x is now close to the high of around 30x during the pandemic. The average forward P/E ratio is also higher than 21.4x last year. Therefore, we believe that large-cap growth stocks are currently expensive compared to the historical average in the past. While IUSG also includes mid-cap stocks, large-cap stocks still represent about 86% of its portfolio. Therefore, we believe that IUSG is also expensive.

Investor takeaways

We think IUSG has better growth characteristics than the broader market, but it may not be the best way to own growth stocks. This is due to the inclusion of mid-cap stocks, which typically underperform large-cap stocks over the long term. Therefore, we believe that investors with a long-term investment horizon may want to look to other large growth funds instead.

Additional disclosure: This is not financial advice and all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.