IJR: A Small Cap ETF With A History Of Beating Peers

By | December 2, 2015

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Summary IJR has very solid diversification within the portfolio. No holdings were listed over .7% and most were below .5%. The ETF has a great expense ratio that is comparable to funds from Schwab and Vanguard. The fund is heavy on the financial sector. The fund reports a beta of .84; however my calculations through InvestSpy suggested a beta of 1.16 for 5 years which was similar to other ETFs holding the same size. The iShares Core S&P Small-Cap ETF (NYSEARCA: IJR ) looks like a fairly reasonable ETF for investors seeking more exposure to small capitalization markets. The fund tracks the S&P SmallCap 600 Index which covers about 3% of the domestic equity market. Stocks in the index have a market capitalization between $400 million and $1.8 billion at the time of entry, though those criteria may fluctuate over time as market valuations change. The securities within the index are selected for liquidity and for industry group representation. The fund uses a passive strategy (also known as indexing) to track the underlying index. The portfolio is not actively managed in an attempt to beat the index and the portfolio will not shift to become more or less defensive based on management’s perspective of whether the market is over or under valued. The prospectus for IJR indicates that the fund uses representative sampling to track the index. That strategy involves selecting companies based on the total portfolio resembling the index. However, when I checked the holdings of the fund there were a hair over 600 individual holdings which is more than I would expect for representative sampling. Expenses The expense ratio is a .12%. This is a very reasonable expense ratio in my estimation. I tend to be fairly cheap on expense ratios and when the ratios go over .15% for domestic ETFs, I find the costs are simply too high and rarely believe that the underlying methodology for selecting stocks will generate enough additional returns before expenses to pay for the expense ratios. For comparison, funds from Vanguard and Schwab are ranging expense ratios from .08% to .09% for exposure specifically to small capitalization stocks. Dividend Yield The dividend yield is currently running 1.41%. For the investor that wants a very strong dividend yield to support them in retirement, this is still too low to qualify. However, for investors that simply want to generate total returns on a risk adjusted basis with increased exposure to small capitalization companies, the fund is still perfectly reasonable. Holdings I created the following chart to demonstrate the weight of the top 10 holdings: (click to enlarge) None of the holdings are over .7% and it seems the most rational way to analyze the fund is to look at the sector allocations. The sector exposure may change over time as the fund follows the index, but this is as close as we can come to assessing the current risk factors. Sectors The fund is heavily overweight on the financial sector and heavily underweight on some of the more defensive allocations such as utilities and consumer staples. For me, that would indicate a more aggressive strategy than I would prefer to use. However, if the investor is buying into the small cap space on the assumption of a prolonged bull market, than this allocation may be very reasonable for them. Conclusion All around this looks like a solid fund. The expense ratio is very reasonable and the holdings include substantial diversification to reduce the impact of any single negative company-specific events. The sector allocation is a little more aggressive than I would have preferred but overall the fund offers precisely what many investors in the small capitalization space would want. The interesting thing for me regarding the risk factors is that the latest fact sheet for the fund indicated that the fund had a beta of only .84. Based on those calculations it would appear that the fund is less volatile than I would expect from the representation of the sectors. I wanted comparable numbers to other ETFs holding small capitalization stocks. I ran a comparison through InvestSpy for the last five years and found a beta of 1.16 using their methodology. Clearly the methodology and the time frame used will have a material impact on risk assessments. The value I calculated on InvestSpy put IJR around the middle of the pack for the beta scores among ETFs investing in small capitalization stocks. On the other hand, their trailing 5 year return was beating every other comparable ETF with returns over 92%. This put them just behind the S&P 500 for the period. The results are demonstrated below. (click to enlarge) When I ran the same test with a time period of 2 years, rather than 5 years, the beta calculated dropped down to .99. In this case, the apparent volatility is materially impacted by the time span that is chosen. Scalper1 News

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