IWO: An Unprofitable Small-Cap Tilt Warrants Caution

Summary I rate the iShares Russell 2000 ETF a sell. Small-cap growth is the weakest factor I can find, both fundamentally and technically. IWO is heavily weighted toward unprofitable small-cap stocks, especially biotech, with 36% in loss-makers and a 25.5x aggregate forward P/E. The headline 58% forward earnings growth comes from loss-makers expected to turn a profit. Among firms already profitable, growth is 15%. Nearly a sixth of assets sit in loss-making healthcare names, and about 12% of the fund has no analyst coverage at all, so the risk is not fully priced. Technical signals indicate further downside for IWO, with weak momentum and price action below key moving averages. I suggest avoiding IWO. gremlin/E+ via Getty Images When readers ask me about why I don't hold small cap exposure currently, my answer is that the Russell 2000 is a zombie index . It holds outright loss makers and firms that only produce enough This article was written by Jack Bowman 10.47K Followers Follow Jack Bowman is a financial columnist and independent analyst, ranked in the top 5% of experts on TipRanks. He writes The Macro Obsession, a Sunday newsletter on finance, technology, and the real economy. It's chart- and narrative-driven. Jack unfiltered, with no editors and no guardrails. On Seeking Alpha, Jack is best known for macro commentary and ETF coverage, though he also writes on technology, materials, and retail equities; most frequently on securities he holds or is weighing for his own portfolio. He invests across asset classes with a core focus on ETFs. Jack spent five years in investment advisory, running Bowman Capital Management, and contracting for independent RIAs, with work largely centered on portfolio management. He passed the Series 65 (the Uniform Investment Adviser Law Examination) and was registered as an investment adviser representative starting in 2021. Before that, Jack was classically trained as a social science educator. He holds a BA in history with a public-history concentration and a master of education in pedagogy. He taught senior-level economics, civics, history, psychology, and journalism at a public high school for four years. Jack was a teacher for six years total, with his earlier two years spent at a public middle school teaching social sciences to academically gifted students. "Successful investing requires holding uncomfortably idiosyncratic positions." — Howard Marks, paraphrasing David Swensen Analyst’s Disclosure: I/we have a beneficial long position in the shares of S&P 500 either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.