An Analysis Of The iShares Micro-Cap ETF

| About: iShares Micro-Cap (IWC)

Summary

The iShares Micro-Cap ETF's return is three times worse than the S&P 500 and the Morningstar Small Blend category.

The fund's negative cash flow, historical book value and sales growth provides a strong hint into the unreliable and inconsistent return of holdings within the fund.

The fund is overly exposed to the struggling healthcare sector. 64% of the fund's 25 worst holdings are within the healthcare sector.

The two-star iShares Micro-Cap ETF (NYSEARCA:IWC) is currently ranked 100th in the Morningstar Small Blend Category in terms of YTD return. The ETF's current YTD return of -6.50% is more than three times as worse as the YTD return of the Small Blend Morningstar Category and the S&P 500.

Now one should not be surprised that a fund rich in microcaps would have a great deal of exposure to the downside. Yet, it is also important to note that micro-cap stocks will have inconsistent returns in bullish markets. As you'll see in the chart below, the iShares Micro-Cap ETF's return has lagged behind both of the aforementioned benchmarks consistently in terms of return.

Surprisingly enough, this ETF has managed to slightly outperform the S&P 500 in its one-month ratio, but not the Morningstar Small Blend Category.

The fund's value and growth measures provide a strong hint into the inconsistent and unreliable returns of the fund. It is not surprising that all of the fund's price multiples are undervalued. Yet, particular concern should be directed towards the negative sales growth, historical earnings % and cash flow growth.

It is quite plausible that this ETF contains equity holdings that may have negative cash flow growth due to expansion projects or due to an enhanced focus on marketing and branding, especially if the firm is in its infancy stage. Nevertheless, it is not surprising that the return of this ETF lags behind their benchmarks consistently given these fundamentals. The measures can be seen below.

Value and Growth Measures

Stock Portfolio

Benchmark

Category Average

Price/Prospective Earnings*

14.44

18.08

16.94

Price/Book*

1.31

1.81

1.91

Price/Sales*

0.80

1.06

0.79

Price/Cash Flow*

5.12

7.82

10.65

Long-Term Earnings %

11.97

12.56

12.47

Historical Earnings %

-8.10

3.27

3.99

Sales Growth %

-6.72

4.90

7.33

Cash-Flow Growth %

-6.12

-0.02

5.81

Book-Value Growth %

-1.46

4.44

7.42

The worst performing sector ETF among U.S small-caps has been the PowerShares S&P Small-Cap Health Care Portfolio ETF (NASDAQ:PSCH) with a return of -11.1% as of 3/19/2016.

Yet, the iShares Micro-Cap ETF has a decided advantage in terms of portfolio weight in the healthcare sector. As we will soon see, there is an abundance of holdings in the healthcare sector that have not done this fund any favors.

Sector

% Stocks

Benchmark

Category Avg.

Healthcare

16.50

12.85

10.97

Out of the fund's 25 worst holdings, 16 of them are from the healthcare sector. The list can be seen below:

Equity Holding

YTD Return

Intra-Cellular Therapies Inc. (NASDAQ:ITCI)

-55.08%

Revance Therapeutics Inc. (NASDAQ:RVNC)

-51.35%

Aerie Pharmaceuticals Inc. (NASDAQ:AERI)

-49.20%

Synergy Pharmaceuticals Inc. (NASDAQ:SGYP)

-48.15%

MacroGenics Inc. (NASDAQ:MGNX)

-47.85%

Otonomy Inc. (NASDAQ:OTIC)

-46.56%

Dermira Inc. (NASDAQ:DERM)

-42.56%

Geron Corp. (NASDAQ:GERN)

-40.91%

PharMerica Corp (NYSE:PMC)

-40.74%

Rockwell Medical Inc. (NYSE:COL)

-40.72%

Sucampo Pharmaceuticals Inc. Class A (NASDAQ:SCMP)

-40.14%

Pacific Biosciences of California Inc. (NASDAQ:PACB)

-36.41%

Heron Therapeutics Inc. (NASDAQ:HRTX)

-36.07%

Cardiovascular Systems Inc. (NASDAQ:CSII)

-35.58%

Akebia Therapeutics Inc. (NASDAQ:AKBA)

-32.97%

Progenics Pharmaceuticals Inc. (NASDAQ:PGNX)

-32.79%

This aforementioned list is proof positive that the healthcare sector has been a drag on this fund.

It is characteristic of micro-cap stocks to have above-average exposure to the downside. Thus, it is no surprise that the iShares Micro-Cap ETF will have a downside capture ratio that shows that the fund is more susceptible to market downturns than its benchmark.

As you'll see in the following chart, the fund has only gotten worse in its ability to limit downside loss over the past two years while the Morningstar Small Blend's Category has improved significantly.

BOTTOM LINE

While the iShares Micro-Cap ETF solid 1-month performance cannot go unnoticed, investors will continue to feel ill at ease knowing that the next series of market losses could nullify any gains garnered by the fund. The fund's worsening downside capture ratio is not good news for potential investors. While the fund has a slight edge in terms of the upside capture ratio over its benchmark category, it is not nearly enough to override the potential downside risk.

The fund has too much exposure to the struggling healthcare sector, especially with regards to small-cap and micro-cap equities. 64% of the fund's 25 worst-performing holdings are in the healthcare sector. As a potential investor, this aforementioned fact would give me a great deal of pause.

The fund manager should make adjustments to the fund's above-average portfolio weight in the healthcare sector. Until then, I would not recommend this fund.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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