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The iShares Russell 2000 Value ETF (NYSEARCA:IWN) is a US small cap value index ETF. Small-cap value stocks are the cheapest sub-segment of the US equity industry and could outperform as valuations continue to normalize across the broader market. Small cap value stocks are also much riskier than average and would likely underperform if economic conditions deteriorate. IWN is a buy, but only suitable for more aggressive investors. With a meager 1.8% return, 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 10-year CAGR: 9.42%

IWN – Overview

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

Russell 2000 Index

Russell Corporate Website

The index then ranks those 2,000 stocks based on their price-to-book ratio, past earnings growth, and expected future growth. Value stocks, those with the lowest scores in these three quantitative measures, are then included in the index. Weightings take valuations into account, with lower valuations equaling higher weightings. This is a simplified account of how the system works. There are also quite a few glitches and unnecessarily complex calculations, but these are not that important, at least in my opinion.

IWN’s underlying index is meant to focus on small-cap value stocks, and it achieves that goal, with the fund boasting a lower valuation and weighted average market capitalization than its peers.

IWN ETF Valuation

Fund Filings – Table 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. The largest holdings and industry weightings are as follows.

IWN ETF Holdings

IWN company website

IWN sectors

IWN company website

As with most other small-cap and value funds, IWN is overweight most slow-growing old-economy industries, including finance, industrials, real estate and energy, but underweight l high-growth and expensive technology industry. Thus, the relative performance of the fund is highly dependent on the relative performance of these industries, especially technology. IWN tends to outperform when tech underperforms, as it has since the start of the year when industry valuations began to normalize.

Return of the IWN ETF
Data by YCharts

The reverse is also true. IWN tends to underperform when technology outperforms, as it did in 2020 when the coronavirus pandemic was in full swing.

IWN ETF return price
Data by YCharts

In my view, IWN’s sector exposures are neither positive nor negative, but are an important factor for investors to consider. Tech bulls should likely look for alternatives to IWN, while investors concerned about frothy tech valuations might consider an investment in the fund.

Other than the above, little else stands out about IWN, its strategy or its holdings. It is a US small cap value index ETF, and its holdings and characteristics reflect that.

IWN – Investment Thesis

IWN’s investment thesis is remarkably simple. The fund is at an incredibly cheap valuation, which could lead to meaningful, above-market returns if valuations normalize. IWN itself sports a PE ratio of 10.9x and a PB ratio of 1.4x, approximately half that of most broad-based US equity indices. It’s an incredibly cheap valuation, all things considered.

IWN ETF Valuation

Fund Filings – Table by Author

Importantly, small-cap value stocks currently boast the cheapest valuations of any sub-segment within the equity industry, both in absolute terms and historical basis. The small cap stock is the cheapest among its peers, and cheaper than it has been in the past, a solid combination.

Small cap stock is the cheapest among its peers

JP Morgan Guide to the Markets

In my view, the fact that these stocks are cheaper on a historical basis is of particular significance. Small cap value stocks still trade at lower valuations than growth stocks, but the spread is wider than average and by a reasonably large margin. Growth stocks are 40% more expensive than their historical average, while small cap stocks are currently 14% cheaper than the same, for a +50% valuation gap between these segments. This is a huge gap, and quite fast too, but not unprecedented. Growth stocks were even After expensive during the dotcom bubble, at least until the bubble burst.

Relative valuations between value and growth

JP Morgan Guide to the Markets

In my view, valuation gaps like the ones above are unlikely persist into the future. The markets are most rational, especially in the long term, and the historical precedent seems to indicate that these massive deviations are not sustainable. Above all, the valuations have started to normalize. As can be seen above, valuation gaps were widest a few months/weeks ago and have started to move up lately. The normalization mainly consisted of deep losses and underperformance in the technology industry, with small caps themselves suffering below average losses.

IWN vs QQQ vs SPY price
Data by YCharts

As valuations continue to normalize, IWN should continue to outperform most broad equity indices. Sooner or later, equity markets will recover and this outperformance should translate into meaningful, above-market returns for the fund and its shareholders, a significant benefit for them.

Incidentally, IWN has significantly outperformed most broad equity indices, including the S&P 500, since its inception. In my opinion, the forward-looking analysis above is much more important than the fund’s past performance history, but it is an outstanding track record nonetheless, and something investors should keep in mind.

Price IWN vs. SPY
Data by YCharts

IWN – Risks and disadvantages

IWN is a solid fund and investment opportunity, but it’s not without its drawbacks. Three stand out.

First, the fact that small-cap value companies tend to be much riskier than average. Small businesses typically have relatively weak balance sheets, less diversified sources of revenue, and fewer and more expensive financing options. Value stocks are also generally riskier and of lower quality: otherwise they would not trade at low prices and valuations. Small cap value stocks have all the disadvantages of small companies and value stocks, and are therefore significantly riskier than average. Expect large and 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 very diversified and the company relies heavily on energy prices for its revenue, earnings and cash flow. Losses could pile up in a downturn, as happened in early 2020. Losses could lead to significant losses or 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 since changed significantly so that CHK is currently at no real risk of bankruptcy, but it seems clear that the fund’s holdings are incredibly risky.

Second, IWN’s performance is highly dependent on (fluctuating) market sentiment, and there can be no assurance that such sentiment will be favorable to the fund or its underlying holdings. Although this is true for almost all investments, it is notably true of the IWN. Some funds or investments may have high dividends, which guarantees a certain return regardless of market conditions, but IWN only yields 1.8%. Other funds or investments could engage in large shareholder buyouts, which act as a catalyst for higher stock prices and capital gains, but IWN’s holdings do not do so in a meaningful way. . IWN’s performance is almost entirely dependent on the market and, as the saying goes, markets can stay irrational longer than you can stay solvent.

Third, and somewhat related to the above, is the fact that IWN has underperformed against most general US equity indices since around 2017. The underperformance is quite significant, but almost entirely centered on 2019-20, during which the technology soared.

Data by YCharts

Cheap IWN valuation should lead to strong, above-market returns in the future, but that hasn’t been the case in the past, and it very well may not be the case in the future.

On a more positive note, the fund’s performance has improved since the beginning of the year, so the situation finally seems to be changing course.

iShares Russell 2000 Value ETF Return Price
Data by YCharts

In my opinion, the positives of IWN outweigh its negatives, but the fund has its fair share of negatives.


IWN invests in US small cap value stocks, the sub-segment of the equity market with the cheapest valuation. The fund is a buy, but generally only suitable for more aggressive investors.

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