IWO is the iShares Russel 2000 Growth ETF. It is an ETF that contains a large number of equities from small-cap US companies. It currently has over 1,000 different companies’ shares in it, and the largest holding is Shockwave Medical, Inc (SWAV) which is only about 0.9% of the total portfolio. I took this position starting in March 2020.
Initially, I wanted to own some IWO because I believed, based on my analysis, that in years when the S&P500 performed well, IWO would perform even better still. That way, in good years, my portfolio could outperform the S&P500 and since I am optimistic overall about the long run performance of the stock market, this seemed like a good way to capture even more gains. However, the downside to owning IWO is that in bad years in the stock market, I could expect IWO to do even worse than the S&P500. That is especially clear this year when the market has performed poorly. To date, my IWO position has only appreciated about 10%. A year ago it had appreciated around 50%, so it has lost a lot of value since then.
My investment thesis around IWO is that in the long run, I think interest rates will be low. Right now the Federal Reserve is in the middle of raising interest rates, but I think within the next few years they are going to have to lower them again. Low interest rates are bullish for IWO for a couple reasons. First, low rates mean that it is cheap for small firms to finance their operations so they can grow. When the cost of capital is low, firms can borrow money more easily to help grow their business. Second, low rates mean that the present value of future cash flows from these firms increases. Increasing the value of the cash flows (dividends) today is bullish for the price of IWO.
Here’s a chart showing the results of a simulation forecasting future performance of 1 share of IWO (starting value per share = $100).
As can be seen, in good years (75th percentile) IWO vastly over-performs normal years (50th percentile). It will even make money in periods of under-performance, provided a sufficiently long holding period. Given my hypothesis about interest rates and the simulation output, I think IWO is still a good investment, despite its recent poor performance. That said, I do not think it will pay off significantly unless and until rates go lower.