IWN: Small-Cap Value ETF, Cheapest Equity Segment In The Market


  • Markets are tumbling down.
  • Valuations remain elevated, with some exceptions.
  • IWN is one such exception.
  • An overview of the fund follows.
  • This idea was discussed in more depth with members of my private investing community, CEF/ETF Income Laboratory. Learn More »

Sale Concept, Percent Sign, Price Discount on Speech Bubble

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The iShares Russell 2000 Value ETF (NYSEARCA:IWN) is a U.S. small-cap value index ETF. Small-cap value stocks are the cheapest U.S. equity industry sub-segment, and could outperform as valuations continue to normalize across the market. Small-cap value stocks are also significantly riskier than average, and would likely underperform if economic conditions were to worsen. IWN is a buy, but only appropriate for more aggressive investors. With a measly 1.8% yield, the fund is simply not an effective income vehicle.

IWN - Basics

  • Investment Manager: BlackRock
  • Underlying Index: Russell 2000 Value Index,
  • Expense Ratio: 0.24%
  • Dividend Yield: 1.69%
  • Total Returns CAGR 10Y: 9.42%

IWN - Overview

IWN is an index ETF investing in U.S. small-cap value stocks. The fund tracks the Russell 2000 Value Index, an index of these same securities. It is a relatively simple index, which starts by selecting all U.S. equities that meet a very basic set of price, liquidity, trading, and voting rights criteria. Applicable stocks are then ranked according to their market-cap, with the index including stocks ranked #1,001-#3,000. These effectively comprise the U.S. small-cap equity universe. FTSE provides investors with the following table summarizing the situation:

Russell 2000 Index

Russell Corporate Website

The index then ranks these 2000 stocks according to their price to book ratio, past earnings growth, and future expected growth. Value stocks, those with the lowest scores in these three quantitative metrics, are then included in the index. Weights take into consideration valuations, with lower valuations equaling greater weights. This is a simplified account of how the system works. There are quite a few extra, unnecessarily complex kinks and calculations too, but these are not all that important, in my opinion at least.

IWN's underlying index is meant to focus on small-cap value stocks, and it accomplishes said goal, with the fund sporting a lower valuation and weighted average market-cap than its peers.

IWN ETF Valuation

Fund Filings - Chart by author

IWN's underlying index is quite broad, which results in a reasonably well-diversified fund. IWN invests in over 1,000 securities from all relevant industry segments. Largest holdings and industry weights are as follows.

IWN ETF Holdings

IWN Corporate Website

IWN Sectors

IWN Corporate Website

As with most other small-cap and value funds, IWN is overweight most slow-growing, old-economy industries, including financials, industrials, real estate, and energy, but underweight the high-growth, expensive tech industry. As such, the fund's relative performance is strongly dependent on the relative performance of these industries, especially tech. IWN tends to outperform when tech underperforms, as has been the case YTD, in which industry valuations have started to normalize.

IWN ETF return
Data by YCharts

The opposite is true as well. IWN tends to underperform when tech outperforms, as was the case during 2020, when the coronavirus pandemic was in full swing.

IWN ETF return price
Data by YCharts

In my opinion, IWN's industry exposures are neither a positive nor a negative, but are an important factor for investors to consider. Tech bulls should probably look for alternatives to IWN, while investors concerned about frothy tech valuations could consider an investment in the fund.

Besides the above, not much else stands out about IWN, its strategy or holdings. It is a U.S. small-cap value index ETF, and its holdings and characteristics reflect that.

IWN - Investment Thesis

IWN's investment thesis is remarkably simple. The fund sports an incredibly cheap valuation, which could lead to significant, market-beating returns if valuations normalize. IWN itself sports a PE ratio of 10.9x and a PB ratio of 1.4x, around half that of most broad-based U.S. equity indexes. It is an incredibly cheap valuation, all things considered.

IWN ETF Valuation

Fund Filings - Chart by author

Importantly, small-cap value stocks currently sport the cheapest valuations out of all equity industry sub-segments, on both an absolute and historical basis. Small-cap value is cheapest amongst its peers, and cheaper than it has been in the past, a solid combination.

Small-cap value is cheapest amongst its peers

J.P. Morgan Guide to the Markets

In my opinion, the fact that these stocks are cheaper on a historical basis is of particular importance. Small-cap value stocks always trade with lower valuations than growth stocks, but the gap is wider than average, and by a reasonably large margin. Growth stocks are 40% more expensive than their historical average, while small-cap value stocks are currently 14% cheaper than the same, for a +50% valuation gap between these segments. This is a massive gap, and quite rate too, but not without precedent. Growth stocks were even more expensive during the dot-com bubble, at least until the bubble burst.

Value vs growth relative valuations

J.P. Morgan Guide to the Markets

In my opinion, valuation gaps like the above are unlikely to persist into the future. Markets are mostly rational, especially in the long-term, and the historical precedent does seem to indicate that these massive gaps are unsustainable. Importantly, valuations have started to normalize. As can be seen above, valuations gaps were widest a few months / weeks ago, and have started to creep back up as of late. Normalization has mostly consisted of significant losses and underperformance in the tech industry, with small-caps themselves suffering lower than average losses.

IWN vs QQQ vs SPY price
Data by YCharts

Insofar as valuations continue to normalize, IWN should continue to outperform relative to most broad-based equity indexes. Sooner or later equity markets will recover, and said outperformance should translate into significant, market-beating returns for the fund and its shareholders, a significant benefit for the same.

As an aside, IWN has significantly outperformed relative to most broad-based equity indexes, including the S&P 500, since inception. In my opinion, the forward-looking analysis above is of significantly greater importance than the fund's past performance track-record, but it is an outstanding performance track-record regardless, and something for investors to keep in mind.

IWN vs SPY price
Data by YCharts

IWN - Risks And Drawbacks

IWN is a strong fund and investment opportunity, but it is not one without drawbacks. Three stand out.

First is the fact that small-cap value companies tend to be significantly riskier than average. Smaller companies generally have comparatively weak balance sheets, less diversified revenue streams, and fewer, more expensive financing options. Value stocks are also generally riskier and of lower quality: they wouldn't be trading at low prices and valuations otherwise. Small-cap value stocks have all the negatives of both small companies and value stocks, and so are significantly riskier than average. Expect significant, above-average losses during downturns and recessions.

As an example of the above, we have Chesapeake Energy (CHK), the fund's third-largest holding. CHK is an energy company. Revenues are not that diversified, and the company is strongly dependent on energy prices for its revenues, earnings, and cash-flows. Losses could mount during a downturn, as occurred in early 2020. Losses could lead to significant losses, even defaults, as was the case in mid-2020, with the company filing for Chapter 11 bankruptcy protection in June of the same year. Conditions have materially changed since, so CHK is not currently at any real risk of bankruptcy, but it seems clear that the fund's holdings are incredibly risky.

Second is the fact that IWN's performance is strongly dependent on (fickle) market sentiment, and there is no guarantee that sentiment will be kind to the fund or its underlying holdings. Although this is true for almost all investments, it is particularly true of IWN. Some funds or investments might have strong dividends, which ensure some amount of returns regardless of market conditions, but IWN only yields 1.8%. Other funds or investments might engage in significant shareholder buybacks, which act as a catalyst for higher share prices and capital gains, but IWN's holdings do not do so in any significant capacity. IWN's performance is almost entirely dependent on the market, and as the saying goes, markets can remain irrational longer than you can stay solvent.

Third, and somewhat related to the above, is the fact that IWN has underperformed relative to most broad-based U.S. equity indexes since around 2017. Underperformance is quite significant, but almost entirely centered on 2019-2020, during which tech soared.

IWN ETF price
Data by YCharts

IWN's cheap valuation should lead to strong, market-beating returns moving forward, but that has not been the case in the past, and it could very well not be the case in the future.

On a more positive note, the fund's performance has improved YTD, so the situation seems to finally be changing course.

iShares Russell 2000 Value ETF return price
Data by YCharts

In my opinion, IWN's positives outweigh its negatives, but the fund does have its fair share of negatives.


IWN invests in U.S. small-cap value equities, the equity market subsegment with the cheapest valuation. The fund is a buy, but generally only appropriate for more aggressive investors.

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This article was written by

Juan de la Hoz profile picture
CEF/ETF income and arbitrage strategies, 8%+ portfolio yields

Juan has previously worked as a fixed income trader, financial analyst, operations analyst, and economics professor in Canada and Colombia. He has hands-on experience analyzing, trading, and negotiating fixed-income securities, including bonds, money markets, and interbank trade financing, across markets and currencies. He focuses on dividend, bond, and income funds, with a strong focus on ETFs, and enjoys researching strategies for income investors to increase their returns while lowering risk.


I provide my work regularly to CEF/ETF Income Laboratory with articles that have an exclusivity period, this is noted in such articles. CEF/ETF Income Laboratory is a Marketplace Service provided by Stanford Chemist, right here on Seeking Alpha.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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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