Should iShares Morningstar Small-Cap Growth ETF Be on Your Investing Radar?

Designed to provide broad exposure to the Small Cap Growth segment of the US equity market, the iShares Morningstar Small-Cap Growth ETF ISCG is a passively managed exchange traded fund launched on 06/28/2004.

The fund is sponsored by Blackrock BLK. It has amassed assets over $583.77 million, making it one of the average sized ETFs attempting to match the Small Cap Growth segment of the US equity market.

Why Small Cap Growth

With more potential comes more risk, and small cap companies, with market capitalization below $2 billion, epitomizes this way of thinking.

Growth stocks have higher than average sales and earnings growth rates. While these are expected to grow faster than the broader market, they also have higher valuations. Also, growth stocks are a type of equity that carries more risk compared to others. When you consider growth versus value, growth stocks are usually the clear winner in strong bull markets but tend to fall flat in nearly all other environments.

Costs

Cost is an important factor in selecting the right ETF, and cheaper funds can significantly outperform their more expensive counterparts if all other fundamentals are the same.

Annual operating expenses for this ETF are 0.06%, making it the least expensive products in the space.

It has a 12-month trailing dividend yield of 0.63%.

Sector Exposure and Top Holdings

While ETFs offer diversified exposure, which minimizes single stock risk, a deep look into a fund's holdings is a valuable exercise. And, most ETFs are very transparent products that disclose their holdings on a daily basis.

This ETF has heaviest allocation to the Industrials sector--about 23.10% of the portfolio. Healthcare and Information Technology round out the top three.

Looking at individual holdings, Microstrategy Inc Class A MSTR accounts for about 1.09% of total assets, followed by Natera Inc NTRA and Texas Roadhouse Inc TXRH.

The top 10 holdings account for about 5.93% of total assets under management.

Performance and Risk

ISCG seeks to match the performance of the MORNINGSTAR US SML CP BRD GRWTH EXTD ID before fees and expenses. The Morningstar US Small Cap Broad Growth Extended Index comprises of small-capitalization U.S. equities that exhibit growth characteristics.

The ETF has gained about 9.02% so far this year and is up about 12.33% in the last one year (as of 07/31/2024). In the past 52-week period, it has traded between $35.43 and $48.99.

The ETF has a beta of 1.08 and standard deviation of 23.73% for the trailing three-year period. With about 1000 holdings, it effectively diversifies company-specific risk.

Alternatives

IShares Morningstar Small-Cap Growth ETF holds a Zacks ETF Rank of 2 (Buy), which is based on expected asset class return, expense ratio, and momentum, among other factors. Because of this, ISCG is a great option for investors seeking exposure to the Style Box - Small Cap Growth segment of the market. There are other additional ETFs in the space that investors could consider as well.

The iShares Russell 2000 Growth ETF IWO and the Vanguard Small-Cap Growth ETF VBK track a similar index. While iShares Russell 2000 Growth ETF has $11.99 billion in assets, Vanguard Small-Cap Growth ETF has $17.61 billion. IWO has an expense ratio of 0.24% and VBK charges 0.07%.

Bottom-Line

Retail and institutional investors increasingly turn to passively managed ETFs because they offer low costs, transparency, flexibility, and tax efficiency; these kind of funds are also excellent vehicles for long term investors.

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