This compelling exchange-traded fund has a new benchmark and price tag.
IShares Core S&P U.S. Growth ETF IUSG is one of the lowest-cost funds in the large-growth Morningstar Category, giving it a sizable cost advantage against most of its peers. The fund's broad market-cap-weighted portfolio effectively diversifies risk, accurately represents its target market, and promotes low turnover. These traits further enhance the fund's appeal, supporting a Morningstar Analyst Rating of Silver.
In January 2017, BlackRock switched the fund's benchmark to the S&P 900 Growth Index from the Russell 3000 Growth Index, which effectively removed its small-cap holdings. This change was motivated by client requests to carve out small caps and BlackRock's desire to align the fund with the broader suite of iShares "core" branded U.S. equity products, which use S&P indexes. Along with this change, BlackRock cut the fund's fee to 0.05% from 0.07% and absorbed the resulting trading costs.
The new index provides very similar exposure to the Russell 1000 Growth Index. In fact, more than 85% of their assets overlap, so they track each other closely. Like the Russell index, the fund's new benchmark targets U.S. large- and mid-cap stocks representing the faster-growing and more richly valued half of their market segment. This sweeps in more than 500 holdings, which the fund weights by market capitalization, pulling it toward giant firms such as Apple AAPL, Amazon.com AMZN, and Facebook FB. The largest stocks are not necessarily the fastest-growing, but they tend to be more profitable and less volatile than their smaller counterparts.
Unlike most indexes, the fund's parent index, the S&P 900, is maintained by a committee rather than a set of mechanical rules. It also requires new constituents to have positive net income over the previous four quarters, which introduces a slight quality tilt. Despite these differences, the composition of this portfolio is similar to its index peers.
The fund has performed well over the long term. It beat the large-growth category average by 1.66 percentage points annually over the trailing 10 years through January 2017, with comparable volatility. This was partially due to its durable cost advantage.
The fund's holdings enjoy many attractive attributes. They tend to have better earnings-growth prospects and profitability (reflected in their higher average return on invested capital) and are more likely to sport durable competitive advantages than their value counterparts. These characteristics are reflected in their higher valuations. As a result, growth stocks are not necessarily better investments than value stocks. From its inception in December 1978 through January 2017, the Russell 1000 Growth Index (which offers similar exposure to this fund) actually lagged the Russell 1000 Value Index by 1.2 percentage points annualized. What matters is realized growth relative to expectations, which is hard to forecast.
There is a risk that investors may become overly optimistic about the growth prospects of the fund's holdings and extrapolate past growth too far into the future. A company can only grow faster than its industry by taking market share away from its competitors. But growth encourages imitation, and rival firms tend to react aggressively to preserve their market share. Growth also becomes more difficult to sustain as a firm becomes larger. The fund eventually jettisons holdings that drift out of the growth style zone, but these stocks can remain in the portfolio long after their growth has started to slow.
Disruptive innovation is a strong driver of growth. For example, Amazon.com, Tesla TSL, Netflix NFLX, and Salesforce.com CRM have disrupted the retail, automotive, home entertainment, and enterprise software markets, respectively, with innovative products and business models that have allowed them to grow at high rates. But disruption can erode established firms' growth, and it is often difficult to anticipate.