IJT: Small-Cap Growth Looks Interesting Now (NASDAQ:IJT)

Small-caps have been relative underperformers against the S&P 500 for some time, but at showing some signs of life here. Should momentum continue, a small-cap fund focused on growth could be interesting to allocate to. The iShares S&P Small-Cap 600 Growth ETF (NASDAQ:IJT) aims to mirror the performance of the S&P SmallCap 600® Growth Index. With assets under management totaling roughly $5.7 billion and boasting an expense ratio of 0.18%, this fund stands out as a cost-effective option for growth-focused investors.

The investment case for choosing small-cap growth stocks over small-cap value stocks hinges on the potential for outsized returns due to these companies’ rapid growth trajectories, innovation, and the ability to adapt quickly to market changes. Small-cap growth stocks are typically found in emerging industries or sectors with high-growth prospects, and they reinvest earnings back into the business to fuel further expansion, which can lead to significant price appreciation. These stocks are often more volatile and risky, but the trade-off is the opportunity for greater capital gains, especially for investors with a long-term horizon and a higher risk tolerance seeking to capitalize on market trends and the exponential growth phase of burgeoning companies.

An In-Depth Examination of the Fund’s Components

IJT is highly diversified, with no stock making up more than 1.35% of the portfolio’s weight.

The fund’s sector allocation is mostly weighted towards Industrials and Consumer Discretionary stocks, with Technology in 3rd place on overall weighting. It’s worth noting that small-cap industrials have done exceptionally well in the last several months, while other sectors have been a drag on the fund’s overall performance.

The Consumer Discretionary allocation gets to be interesting here. A lot of retailer stock haven’t participated in the upside despite narratives around strong economy and robust consumer. Over the last week, though, there has been some momentum building in retailers. Looking at the XRT ETF as an example, an uptrend may finally be underway. This becomes a net positive for IJT as the Discretionary sector has a number of retailer stocks that can play catch up.

Comparative Analysis with Peers

When juxtaposed with its peer ETFs, IJT maintains a competitive stance. With a net expense ratio of 0.18%, it is slightly more expensive than the SPDR S&P 600 Small Cap Growth ETF (SLYG) at 0.16%, and is more expensive than the Vanguard Small-Cap Growth Index Fund ETF (VBK) at 0.07%. The three funds have largely performed in line with each other, but clearly the fee differential over time makes a difference.

The Merits and Drawbacks of IJT

Investing in IJT comes with a distinct set of advantages and potential drawbacks that investors must consider:

Pros:

• Growth Potential: Small-cap stocks are often poised for robust growth, offering attractive returns for investors.
• Low Cost: With a relatively low expense ratio, IJT stands as a cost-effective vehicle for small-cap exposure.
• Portfolio Diversification: The fund’s diverse holdings can complement core portfolio assets, providing a balance against larger cap-centric investments.

Cons:

• Volatility: The inherent nature of small-cap stocks means higher volatility and, thus, greater risk.
• Sector Concentration: A significant Industrials sector weighting could spell risk if this sector hits a downturn.

Conclusion: Weighing the Investment Potential of IJT

The iShares S&P Small-Cap 600 Growth ETF presents investors with a pathway to the high-growth potential inherent in the small-cap sector. Its well-rounded sector composition, competitive expense ratio, and potential for momentum here make it worth considering. The real question is: Are we on the verge of the bull market really broadening out? Will money position out of large-caps into laggards, and favor the growth style tilt within it? It seems certainly possible. The question, of course, is the form in how that happens. Regardless, I believe small-caps are due for relative strength (up more or down less) against the large-cap side of the market, and if you are of the same mindset, this is a fund that can help capture that potential.

Markets aren’t as efficient as conventional wisdom would have you believe. Gaps often appear between market signals and investor reactions that help give an indication of whether we are in a “risk-on” or “risk-off” environment.

The Lead-Lag Report can give you an edge in reading the market so you can make asset allocation decisions based on award winning research. I’ll give you the signals–it’s up to you to decide whether to go on offense (i.e., add exposure to risky assets such as stocks when risk is “on”) or play defense (i.e., lean toward more conservative assets such as bonds/cash when risk is “off”).