IWV: Future performance will likely remain slightly below the S&P 500

introduction

Back in March 2023, we wrote an analysis on the iShares Russell 3000 ETF (NYSEARCA:IWV). At that time, we noted that IWV was still expensive compared to the historical valuation range of the past two decades. lhave It’s been over a year since we last covered this fund, and we think it’s time for us to analyze it again and offer our suggestions.

Overview of ETFs

IWV holds a portfolio of the 3,000 largest U.S. stocks by market cap. The fund is a better representation of the broader U.S. stock market than the S&P 500, which includes just 500 stocks. However, it has produced slightly lower returns than the S&P 500 in the past, and will likely produce lower returns in the future. Its valuation is more expensive than last year. In addition, there are other funds that track a similar index with a lower expense ratio. Hence, we believe investors You may want to look for a replacement box instead.

Fund analysis

IWV’s momentum continues in 2024

Let’s first check how IWV performed last year. Since the IWV fund price hit a cyclical low in October 2022, the fund has delivered a strong total price return of 44.5%. This was a good result, but still not good enough when compared to the S&P 500. As the chart below shows, the S&P 500 had a total return of 47.3% in the same period, almost 3 percentage points higher than the IWV.

The IWV may underperform the S&P 500 in the future

As we discussed in our analysis of IWV last year, the IWV has lagged the S&P 500 slightly over the longer term as well. In fact, the fund’s total return of 208.3% in the past 10 years was 22 percentage points behind the S&P 500’s 230.3%.

This poor performance is likely due to IWV’s inclusion of mid- and small-cap stocks. Since the IWV includes 3,000 of the largest U.S. stocks by market cap, it will include more mid-cap stocks than the S&P 500, which includes only 500 large-cap stocks. Below is a chart showing the IWV stock pattern. As can be seen in the chart below, large-cap stocks represent only 73% of IWV’s total portfolio. Mid- and small-cap stocks represent 19% and 8% of the total portfolio, respectively.

The consequence of owning mid-cap and small-cap stocks is that it will impact their long-term performance. This is because mid- and small-cap stocks tend to have lower returns over the long term than large-cap stocks. As can be seen in the chart below, the S&P 500 (large-cap) has outperformed the S&P 400 (mid-cap) and S&P 600 (small-cap) indices in the past 15 years. This explains why IWV has generated slightly lower returns than the S&P 500 in the past. If this trend continues, we may continue to see the IWV fund price underperform the S&P 500 in the future.

IWV is more expensive than last year

Let’s now check IWV’s valuation. Since IWV had an amazing performance last year, we expect its valuation to be much higher than last year. Since we used Shiller’s P/E ratio to evaluate last year’s valuation, we will use Shiller’s P/E ratio for the S&P 500 to compare its valuation again. For reader information, the S&P 500 P/E ratio essentially calculates the P/E ratio based on the average inflation-adjusted earnings of the S&P 500 from the past 10 years. Since both the Russell 3000 and the S&P 500 have similar market performance and trends (although one is slightly lower than the other), and both cover 98% and 80% of the total US market in terms of market cap, it is a good tool. To check to see if IWV is expensive or not. In the past 20 years, the Shiller P/E ratio for the S&P 500 has typically been between 20x and 32x. As can be seen in the chart below, Shiller’s current P/E ratio is 34.1x, well above the typical valuation range between 20x and 32x. This ratio is also not far from the peak of about 37 times that was reached during the pandemic. Therefore, we believe that IWV is very expensive now.

The expense ratio is higher than its counterpart

Another downside to owning an IWV is the expense ratio. In fact, the 0.2% expense ratio is higher than the 0.1% expense ratio in its peer Vanguard Russell 3000 ETF (VTHR), which also tracks the Russell 3000. Although this difference may be very small, it is still significant. It can lead to multiple differences in long-term performance. This is exactly the case. As can be seen in the chart below, IWV’s total return of 460.8% has lagged behind VTHR’s 469.2% since 2010.

Investor takeaways

Based on our analysis, it appears that IWV will continue to underperform the S&P 500 over the long term. In addition, IWV also has a higher expense ratio than its peer funds. Therefore, we do not advise investors to own this fund at this time.

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.