We have qualitatively reviewed this strategy and reaffirmed its Average Process and Above Average People ratings. The following text is from Feb. 17, 2023.

IShares Russell 2000 Value ETF IWN is a risky choice in the small-value Morningstar Category. The fund's competitive fee, broad reach, and market-cap-weighted portfolio are compelling features, but the simplistic construction of the parent Russell 2000 Index raises market impact costs and places greater emphasis on volatile low-quality companies.

The fund's market-cap-weighted portfolio captures the cheaper half of the small-cap Russell 2000 Index. The small-cap market tends to be quite volatile, but that additional volatility has been rewarded over the long term with better performance for small-cap stocks than their large-cap counterparts. Investors should still control risk if they want to reap those rewards, and this is where the Russell 2000 Index falls short.

Picking from the smallest 2,000 stocks in the Russell 3000 Index pushes this fund's average market-cap lower than typical peers, steering it toward smaller names with poor fundamentals. Stocks like these usually fall quickly during market selloffs and may not fully recover if risk-hungry investors lose their appetite. Rival indexes of similar average holding size incorporate basic screens to prevent these stocks from having an outsize impact on performance. The Russell 2000 Index's lack of measures to control risk allows low-quality names to flourish in this fund's portfolio, exposing investors to considerable risk when markets sour.

Market-impact costs around the index’s June rebalance date can also detract from returns over a full market cycle. Unlike most small-cap benchmarks, the Russell 2000 Index does not use turnover buffers around its lower market-cap threshold. Hundreds of illiquid micro-cap stocks cycle in and out of the portfolio at each annual rebalance, and vast amounts of money benchmarked to the Russell 2000 Index tend to push their prices around. That means the fund often settles for unfavorable prices when it reconstitutes its holdings.

The fund still diversifies risk effectively across its almost 1,400 holdings. The value stocks that constitute this portfolio are usually worthy of their modest valuations, but the fund’s broad reach ensures that one stock’s misfortune should not derail the entire portfolio. The fund underperformed its average category peer by 9 basis points annualized over the 10 years through January 2023. Volatility was higher because of its smaller market-cap orientation, widening the risk-adjusted return deficit.

Analyst Rating

Risky strategy in a risky category

Analyst

Zachary Evens

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We have qualitatively reviewed this strategy and reaffirmed its Average Process rating. The following text is from Feb. 17, 2023.

The strategy effectively captures the small-cap value market segment and diversifies away most stock-specific risk with its broad reach. But the Russell 2000 Index centers around volatile low-quality names, and its simplistic construction saddles investors with avoidable market impact and trading costs. It receives an Average Process Pillar rating.

Average

Process

We have qualitatively reviewed this strategy and reaffirmed its Above Average People rating. The following text is from Feb. 17, 2023.

BlackRock's industry-leading technology, global footprint, and extensive supporting cast earn an Above Average People Pillar rating.

The team employs BlackRock's Aladdin platform to fulfill much of its portfolio management tasks, and global trading desks allow traders to conduct foreign transactions in a cost-effective way.

The iShares team has endured some turnover in recent years. But index-tracking performance should remain tight, thanks to heavily automated processes and several long-tenured managers that remain at the helm. Amy Whitelaw left the team in February 2023 for another role within the organization. Paul Whitehead replaced Alan Mason as a manager in January 2022, when Mason left to focus on the firm's customized institutional indexing capabilities. IShares has not named a successor for Whitehead. Greg Savage, Jennifer Hsui, and Whitehead will continue to oversee the fund.

These managers interact with a wider team of traders and managers around the globe to execute the fund's day-to-day operations. The larger number of managers also limits the impact of personnel turnover when it does occur.

Above Average

People

BlackRock offers compelling options across asset classes and vehicles. It earns an Above Average rating for Parent. 
The firm’s approximately USD 8 trillion in assets under management, as of Sept. 30, 2022, gives it unparalleled scale and influence. It is a market-leading index fund provider globally, and its iShares exchange-traded fund franchise offers a low-cost lineup of core funds that investors can use to build a well-diversified portfolio for dirt cheap. The firm can be more adventurous in its ETF launches than some peers, so not everything it launches is appropriate for the masses. As a result, it is likely to have more ETF closures than peers that stick to the basic building blocks.  
The firm’s active fixed-income and multi-asset efforts also stand out as some of the best in the industry. Those benefit from BlackRock’s commitment to building a first-class risk management system via its Aladdin analytics software. The software is also available for sale to other firms and has proved to be a popular option for competitors, a testament to its usefulness. 
More recently, the firm has shifted its focus to ESG offerings and incorporating ESG across its investment lineup, leading to a political backlash in the United States.
BlackRock isn’t the best at everything it tries to do, but retail investors, financial advisors, and large institutions could all build robust portfolios using BlackRock’s products.

Parent

iShares Russell 2000 Value ETF

IWN tracks an index of US small-cap value stocks. The index selects value stocks from a universe of stocks ranked 1001-3000 by market-cap.

iShares Russell 2000 Value ETF combines size and value, two factors of the Fama-French model, and is focused on financials. The IWN ETF has been lagging the Russell 2000 index for 10 years, and it has lagged other small-cap value funds for 2 years. Actively managed funds DFSV and AVUV may be more attractive options for investors.

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iShares Russell 2000 Value ETF combines two factors of the Fama-French model: size and value. IWN may be useful not only in a buy-and-hold approach, but also in tactical allocation strategies. IWN has underperformed its parent index and peers in the past 10 years and has some weaknesses in its methodology.

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The Fed has restarted rate hikes to curb inflation, but inflation is lower than earlier this year, and the economy is performing well. The iShares Russell 2000 Value ETF provides exposure to small cap value companies with tailwinds from US economic growth and steady interest rates. IWN has underperformed its peers in terms of returns and has higher expense ratios, making other ETFs like IJS or VBR better options for small cap value exposure.

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