IRRRF: Strong Price Growth, Low Trading Volume

iShares Core MSCI World UCITS ETF (IRRRF) is a fully diversified exchange traded fund launched and managed by BlackRock Asset Management Ireland Limited. The fund has an asset under management (AUM) of $59.5 billion which it has invested in public equity shares of large-cap and mid-cap companies in public equity markets throughout the globe. This ETF has been trading as an OTC stock since July 29, 2016, more than five years ago.

iShares Core MSCI World UCITS ETF is also listed in London stock exchange (LSE) under the tickers SWDA and IWDA. While SWDA is traded in British pound (GBP), IWDA is traded in US dollar (USD). This product is also listed on Euronext Amsterdam, Bolsa Mexicana De Valores, Borsa Italiana, SIX Swiss Exchange, and Deutsche Boerse Xetra. Because this ETF diversifies its investments in all major equity markets, investors throughout the globe might be interested in investing in this ETF in their home currencies.

iShares Core MSCI World UCITS ETF invests in the equity shares of a whopping 1,542 companies, with US-based companies accounting for around 69 percent of the total portfolio. Another 20 percent is invested in Japan, UK, Canada, France and Switzerland based companies. This ETF rebalances its portfolio at the end of every quarter.

Managing such a deep level of diversified holdings is an extremely challenging task, and may increase the fund management expenses. However, this fund has been able to operate with a low expense ratio of 0.2%. This is one of the rarest funds which does not pay any dividend, thus is out of consideration for income seeking investors. It was formerly known as iShares III Public Limited Company – iShares MSCI World UCITS ETF, which was formed on September 25, 2009 and was domiciled in Ireland.

This ETF hardly has any significant holdings, as its investments are spread over 1,542 companies each in very small proportion. The fund seeks to replicate the performance of the MSCI World Index, by employing representative sampling methodology. In representative sampling, a few stocks from the benchmark index are selected in such a way that it includes stocks from every sector, every geographic region, and all types of market capitalization. This way the iShares Core MSCI World UCITS ETF becomes a representative index (not a replica) of the MSCI World Index.

iShares Core MSCI World UCITS ETF’s price returns have been strong. Over the past 5 years, IRRRF’s price grew by a healthy 78.4 percent compared to 88.6 percent of S&P 500 index. Over the past 3 years, IRRRF has recorded a price growth of 46.7 percent. During the same period, S&P 500 index recorded a growth of 51 percent. So, IRRRF was successful in generating a price CAGR of around 13 percent in the medium term. However, the past one year has been very poor for this ETF, and failed to generate a growth of even 4 percent.

A very small proportion of IRRRF’s portfolio (22.5 percent) is invested in basic or core industries – materials, utilities, energy, real estate and consumer staples – that derive their revenue from basic needs of people (e.g. food, house, gas, minerals, electricity). This ETF has significant investments in stocks of financial (14 percent), healthcare (12 percent), consumer discretionary (11.5 percent), and industrial (10 percent) sectors. Together, these sectors constitute 47.5 percent of IRRRF’s total equity holdings.

The largest chunk of investments (30 percent) is made in information technology & communication (ITC) stocks. Five out of its top seven holdings (more than 1 percent of the portfolio) are from the ITC sector – Apple Inc. (AAPL), Microsoft Corporation (MSFT), Alphabet Inc. (GOOG) (GOOGL), Meta Platforms, Inc. (FB), and Nvidia Corporation (NVDA). The other two are automobile giant Tesla, Inc. (TSLA), and e-commerce giant Amazon.com, Inc. (AMZN), which have high linkages with the technology sector. Though this ETF is quite well diversified, still 30 percent investment in technology stocks poses a risk of sudden fall due to poor performance of that sector.

As the operation of these companies are not integral to human existence, these stocks tend to be impacted more due to economic growth and downturn. In general, these stocks are more volatile. In the past five years, unemployment, higher tariff, inflation, COVID-related supply chain disruptions and worker shortages have made significant impacts on a few of these non-core sectors, the impact of which is yet to be overcome. However, the extreme level of diversification has been helpful for this fund to nullify the impact of the pandemic and all other macroeconomic hiccups to a large extent.

The holdings of iShares Core MSCI World UCITS ETF recorded an average P/E of 19.4 and a P/B ratio of 3. The price multiples put this ETF slightly on the higher side of valuation. Though the stock is trading at approximately 7 percent premium to its 52-week low price, still there seems to be downside potential, as indicated by the simple moving averages (SMA). The long-term 200 days SMA (85.35) is partially higher than short-term moving averages of 50 days SMA (83.02) and 10 days SMA (83.94).

In order to be on the safe side under such circumstances, I generally hedge such stocks with call and put options of duration of six months or more. In order to safeguard my investments from an unlikely steep downfall, I prefer to buy a put option at a strike price nearest to the current market price, so that my principal investment does not incur a loss beyond 10 to 15 percent. But, unfortunately, IRRRF does not have any option. This limits the potential to safeguard or protect investments in iShares Core MSCI World UCITS ETF.

A very interesting fact about iShares Core MSCI World UCITS ETF’s shares is that the price has remained unchanged for the past 10 days, and only one share has been transacted during the entire period. Earlier also, this stock price remained unchanged at frequent intervals. However, such a long interval is rare. This signifies that investors are not too keen to buy this stock, nor are existing investors in a hurry to liquidate their holdings.

The positive thing about iShares Core MSCI World UCITS ETF is that over the medium term, this diversified ETF has been able to match the price growth of the S&P 500 index. However, we have to wait for a few more years to witness its long-term growth. Going by the performance so far, and the depth of its diversification, I don’t find any reason why this ETF will not be able to continue its historical growth, and generate something close to a double-digit price growth over a longer time horizon.

But at the same time, this fund neither allows me to earn a steady dividend income, nor does it enable me to hedge my exposure with call and put options. Thus, this ETF enhances my investment risk. Though it does seem to have long-term growth potential due to its extreme level of diversification (geographical, sectorial, and fund size), as a risk neutral person, for the time being, I’d prefer to stay away from iShares Core MSCI World UCITS ETF due to the concentration of technology stocks, absence of dividend as well as unavailability of hedging options.