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iShares Russell 3000 ETF (NYSEARCA:IWV) is an exchange traded fund launched by BlackRock, Inc. and is managed by BlackRock Fund Advisors. The fund has assets under management (AUM) over $12.16 billion which it has invested in public equity shares of a whopping 2763 companies. Holding and managing equity shares of such a large number of firms, though challenging, provides this fund extreme levels of diversification. Despite investing in so many stocks, IWV has a relatively low expense ratio of 0.2%. The fund was incepted on May 22, 2000, and has been paying regular quarterly dividends since its inception. However, IWV has a very low yield and recorded an average yield of 1.66 percent over the past 10 years. Its annual yield has ranged between one percent to two percent.
Majority of IWV’s holdings are in secondary and tertiary sectors such as information technology (27 percent), healthcare (13.6 percent), consumer discretionary (11.7 percent), financial (11.6 percent), industrial (9 percent), communication services (8.5 percent). Together these sectors constitute 81.5 percent of IWV’s total equity holdings. Only 18.5 percent investments are in the equity shares of basic industries – materials, utilities, energy, real estate and consumer staples – that derive their revenue from very basic needs of mass people and industries (e.g. foods, house, gas, minerals and electricity).
iShares Russell 3000 ETF has 2763 equity shares that have been selected from a pool of 3000 equity shares that constitutes the Russell 3000 Index. The Russell 3000 index measures the performance of almost 98 percent of publicly-traded companies in the United states. Not surprisingly, IWV has an equity beta of 1.04, which indicates that the ETF’s market price moves almost in sync with the US equity market. 3,000 companies with highest market capitalization are included in this index, and it is “commonly broken into two subset indexes: The Russell 1000, which measures the 1,000 biggest large-cap U.S. companies, and the Russell 2000, which measures the remaining 2,000 mid-cap and small-cap companies”. Russell 3000 changes its composition in May and June every year. The Russell 3000 index offers a much broader representation of the US equity market compared to any other commonly used indexes, such as S&P 500, The Dow Jones Industrial Average, The Nasdaq Composite Index, etc.
iShares Russell 3000 ETF’s price returns have been strong. Since its inception, IWV generated an annual average return close to 8 percent, compared to 8.15 percent of its benchmark Index – Russell 3000 index. Over the past 10 years, IWV’s market return was very healthy at 16.1 percent compared to 16.3 percent of its benchmark index. Over the past 5 years and 3 years, IWV has recorded an average market price growth of 17.74 percent and 25.5 percent respectively. During the same periods, the benchmark index had an annual average growth of 17.97 percent and 25.79 percent. The difference with the benchmark index is purely due to its expense ratio. Barring 2018, this ETF has recorded a price growth between 20 percent to 30 percent during the past five years. 2018 was a very poor year for the US equity market due to higher tariff, interest rate hikes, and tax cuts.
A detailed analysis of top 60 percent holdings of iShares Russell 3000 ETF at present reveals that as many as 109 equity shares constitute its top 60 percent, out of which only 18 stocks are in the basic sector, constituting 7 percent of total equity holdings. Russel 3000 and IWV’s focus is on high growth stocks from secondary and tertiary sector firms. 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. The US economy had enough volatility during the past five years. Unemployment, higher tariff, interest rate hikes, tax cut, inflation, all played their role. On top of that COVID-related supply chain disruptions and worker shortages made the situation worse. However, the extreme level of diversification has helped this fund to nullify the impact of the pandemic and all other macroeconomic hiccups.
The holdings of iShares Russell 3000 ETF recorded an average P/E of 21.34 and a P/B ratio of 4. The price multiples put this ETF slightly on the higher side of valuation. The stock is trading at approximately 5 percent discount to its 52-week high price. However, it’s not surprising, as there are enough reasons for investors to chase this ETF – extremely strong diversification, steady dividend, strong and steady price growth, and being the best bet in order to invest in the entire US equity market.
Historically, the iShares Russell 3000 ETF has generated an average price growth between 15 to 30 percent over the past 10 years. This ETF has been successful in sailing through the US financial crisis, and covid-19 pandemic. In fact, this fund has been able to match the returns of the S&P 500 index over the years. I don’t find any reason why this ETF will not be able to continue its historical growth, and generate a steady double digit total return over a longer time horizon. As a growth seeking investor, I’d certainly like to keep iShares Russell 3000 ETF in my portfolio of investments.
However, as I have already said, the iShares Russell 3000 ETF is theoretically not suitable to overcome extreme market volatility, or a market crash. As IWV represents almost the entire US equity market, an overall downward movement will anyways lead to a steep fall for this ETF. As IWV is trading very close to its 52 week high and the price multiples are already quite high, there is a theoretical possibility of incurring a short term loss within the next six or nine months. In order to be on the safer side, I’d like to hedge this ETF with calls and put options with duration of six months or more. Though a very limited range of put options are available for November 18 (7.5 months forward), within a strike price between $130 to $280, it’ll be good enough to hedge my naked exposure. In order to safeguard my investments from an unlikely steep downfall, I would prefer to spend another $13 to buy a November 18 put option at a strike price of $245, so that my principal investment does not incur a loss beyond 12.5 percent.
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