IUSG ETF: Goes Beyond S&P 500, But A Double-Edged Sword

By Rob Isbitts

Strategy

iShares Core S&P US Growth ETF (NASDAQ:IUSG) is one of many US-focused equity funds from ETF behemoth BlackRock’s iShares brand. IUSG tracks the S&P 900 Growth Index. The ETF has a long tenure, having started in 2000, just 7 years after the first ETF was created in 1993.

Proprietary ETF Grades

• Offense/Defense: Offense

• Segment: Broad Equity

• Sub-Segment: US Large Cap

• Risk (vs. S&P 500):Similar

Proprietary Technical Ratings

• Short-Term (next 3 months):Sell

• Long-Term (next 12 months):Sell

Holding Analysis

IUSG invests only in US-listed equities. Importantly, it uses a “representative sampling technique” to determine and manage the portfolio. This means that while the ETF is based on an index that is comprised of 900 different stocks, it does not seek to own them all. In fact, IUSG currently owns only about 460 stocks, or about half the components of the S&P 900 Growth Index. That is because the managers determined through quantitative analysis that they could mimic the performance of that index without owning all of the stocks. The result is a portfolio that is widely diversified by sector and market capitalization, to a greater degree than the S&P 500. IUSG’s sector weightings to Technology and Energy are above that of the S&P 500 by a few percentage points each.

Strengths

IUSG has significant overlap with the S&P 500 Index. However, that overlap is not so strong as to render this ETF useless. So, while some would ask “why not just own the S&P 500 (SPY)?”, there are reasons to consider stretching beyond that 500-stock index to a security which owns a similar number of stocks, but dips down much deeper into the market capitalization pool.

As the chart below shows, IUSG has an ebb-and-flow relationship with the S&P 500, in that it outperforms during some periods, typically during bull market phases. This is likely because of the exposure to small cap stocks in addition to the largest companies.

Weaknesses

IUSG can be a riskier proposition than an S&P 500 Index Fund, and its historical Beta of 1.06 over the past 5 years, and 1.19 over the past 2 years bears that out (pun not intended!). As that chart above shows, in 2022, the 1-year rolling return for IUSG versus SPY rolled over. This is not surprising, given large and mega cap stocks have long been considered relatively safer ground than smaller companies.

Opportunities

IUSG’s success, versus the SPY or in general, in pursuit of strong long-term returns has everything to do with the future price behavior of a pair of factors: the smaller-cap component, and the fact that IUSG is more concentrated in its holdings at the top than the broad stock market.

Threats

IUSG’s top 10 holdings comprise 35% of assets as of this writing. That is significantly more concentrated than SPY (24% in top 10 holdings). Furthermore, IUSG’s biggest holding, Apple Inc. (AAPL) occupies more than 10% of assets. That is, of course, the proverbial double-edged sword. Whether it is AAPL, other FAANG holdings which are highly-weighted, or the small cap exposure here, IUSG has clear risk factors versus a more large cap core US equity ETF.

Conclusions

ETF Quality Opinion

IUSG checks all of my boxes for relative stability versus most ETFs we follow. It has BlackRock’s iShares unit behind it, and spreads its opportunity set beyond what ETFs like SPY do.

ETF Investment Opinion

But my weight of the evidence on this one comes down on the side of a Sell rating. That has a lot to do with my well-documented view that the equity market is still enduring a sluggish era. That raises the bar for any equity ETF to get a positive rating from me. In addition, I am not a big fan of ETFs that own hundreds of stocks, since decades of academic studies have shown that diversification loses its benefits quickly well before you even get to 100 stocks, much less 400 or 500.