This is a solid offering, but there are cheaper alternatives.

fundcoverage@morningstar.comIWD
by Alex Bryan
5/14/2019
iShares Russell 1000 Value Index

IShares Russell 1000 Value ETF IWD offers a well-diversified portfolio with low turnover and a sizable cost advantage over its actively managed counterparts. However, it does not make any sector adjustments in its stock-selection approach, which introduces persistent sector tilts that may not be well-rewarded over the long term. And there are cheaper index alternatives (including one that tracks the same index). It earns a Morningstar Analyst Rating of Bronze.

This strategy targets stocks representing the cheaper and slower-growing half of the Russell 1000 Index and weights them by market capitalization. This weighting approach tilts the portfolio toward the largest value stocks. The biggest stocks are not necessarily the cheapest. Market-cap weighting can even reduce the fund's exposure to stocks as they become cheaper, as this typically accompanies a decline in market cap. That said, the fund tends to have a similar value orientation to the large-value Morningstar Category average. Its sector composition is also representative of the category norm.

Large-value stocks tend to be mature businesses that are often trading at low valuations for good reason, including slow expected growth and, in some cases, high business risk. The fund's largest holdings include mature firms such as Johnson & Johnson JNJ, Chevron CVX, AT&T T, and JPMorgan Chase JPM. These large-cap stocks may offer lower return potential than smaller stocks, but they also tend to be less risky.

This well-diversified portfolio holds more than 600 stocks, including some with modest value characteristics. In fact, more than a fourth of the portfolio overlaps with iShares Russell 1000 Growth ETF IWF. These holdings improve diversification and should help reduce the fund's volatility.

While this isn't the cheapest index fund in the category, its low fee gives it a sustainable edge against its actively managed peers. This cost advantage helped the fund outpace the large-value category average by 105 basis points annualized over the trailing 10 years through April 2019, with comparable volatility.



Portfolio Construction

The fund employs full replication to track the market-cap-weighted Russell 1000 Value Index. This index effectively diversifies risk, promotes low turnover, and accurately reflects the composition of its target market segment, supporting the Positive Process Pillar rating. Russell assigns a composite value score to each stock in the Russell 1000 Index using one value metric (price/book ratio) and two growth metrics (I/B/E/S medium-term growth forecast and five-year historical sales per share growth). The two growth attributes receive the same weighting in this calculation as the single-value variable. It then ranks stocks according to this composite value score and fully allocates those representing 25% of the assets in the Russell 1000 Index with the lowest value scores to the growth index and the highest 25% to the value index. Russell partially allocates stocks that fall in between these cutoffs to both the value and growth indexes based on the relative strength of the stock's value and growth characteristics. Together, the value and growth indexes represent 100% of the assets of the Russell 1000 Index. Russell reconstitutes these indexes annually in June.

Fees

Fees take a 0.20% bite out of the fund's returns each year, which is low relative to the category, supporting a Positive Price Pillar rating. However, there are cheaper alternatives, like Vanguard Value ETF VTV, which offers similar exposure for 0.04%. BlackRock engages in securities lending, the practice of lending out the fund's underlying holdings in exchange for a fee. This ancillary income partially offsets the fund's expenses. Over the trailing three years through April 2019, the fund lagged its benchmark by 18 basis points annualized.

S&P 500 index data: S&P 500 Copyright @ 2019

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