IOO: Some Reasons To Stay Faithful Despite The Long Fall Ahead (NYSEARCA:IOO)

The iShares Global 100 ETF (NYSEARCA:IOO) has a highly-diversified portfolio with both growth-oriented tech giants as well as more stable securities within healthcare and consumer defense. IOO could benefit from eventual economic recovery in the United States as well as any momentous innovations from tech companies like Apple (AAPL) and Microsoft (MSFT). However, in the medium term, I believe IOO still has a long way to drop before any sort of rebound. Because of this and its general mediocrity compared to S&P 500 ETFs, I give IOO a long-term Hold.

Ultimately, I believe IOO is a high-quality ETF and those who own it may well profit with a 3-5 year timeframe in mind. I could not bring myself to rate IOO a Buy because it could decline significantly as the United States readjusts from a bearish 2022. Alternatively, one who sells IOO might risk missing out on potential economic recovery following said readjustments.

Apple and Microsoft are the most represented companies in IOO while also being some of largest companies in the world by market cap. These two tech giants will likely be the driving factor in the long-term growth of IOO, as their market dominance remains unmatched. In addition to companies in the United States, IOO also holds many European companies. The United States’ alliance with Europe as well as the two countries’ increasing collaboration in businesses like energy trading also make this ETF attractive.

Strategy

IOO tracks the S&P Global 100 NR USD Index and uses representative sampling. Representative sampling involves holding a representative sample of securities in an underlying index rather than every security. IOO invests primarily in growth and value stocks of giant-cap companies. IOO was launched by BlackRock and is currently managed by BlackRock Fund Advisors.

Holdings Analysis

IOO invests in a broad diversity of sectors, with no more than 30% allocated to a single sector. The main three sectors within IOO include technology (29%), healthcare (13%), and consumer defense (12%). This makes IOO less sector-specific than ETFs I have covered previously, many of which allocate all but a quarter to a specific sector, sometimes sparing even less than that. This makes IOO a potentially attractive option for investors trying to minimize concentration risk as well as gain exposure to an array of different industries. The most prominent holdings in this ETF are Apple and Microsoft, which comprise roughly a quarter of the total portfolio, and over 80% of technology holdings. This makes IOO potentially attractive to growth-oriented investors, particularly those with bullish views on the tech industry. IOO is not particularly geographically diverse, with just over a quarter of holdings residing outside of the United States. Non-United States companies in IOO are located primarily in Europe, with miniscule appearances from Japan and Australia. However, one could argue that IOO may be more international than scripted, as many United States companies frequently conduct business outside the country.

Strengths

IOO has a potentially attractive blend of giant-cap stocks in highly-volatile industries like technology and more stable ones like healthcare and consumer defense. This indicates a somewhat balanced focus on both momentum and safety. This could possibly serve to increase this ETF’s returns while mitigating the impact of market fluctuations. IOO may be an ideal pick for investors who want exposure to a broad range of industries while also devoting attention to the technology juggernauts currently leading the market.

IOO may also benefit from increased trade with Europe, particularly energy trading. This increased trading is primarily a result of Europe’s “energy divorce” with Russia nearly a year after Russia invaded Ukraine. The United States provided Europe with roughly half of its Liquefied natural gas (LNG) reserve in 2022. This cooperation continues today and is contributing to the United States’ role as a major fuel source to Germany and other states in the European Union (EU). This strengthening alliance and merging of economic goals may improve geographical diversification, mitigate geopolitical risks, and increase returns of energy stocks in both countries.

Weaknesses

IOO has some disadvantages against S&P 500 ETFs, namely the Vanguard S&P 500 ETF (VOO). When placed alongside VOO, IOO has a higher expense ratio of 0.40% (vs. 0.03%) as well as a history of underperformance dating as far back as 2014. Though past performance is not necessarily indicative of future earning potential, IOO’s underperformance displays how this ETF doesn’t really offer a risk premium like that of VOO.

Despite being marketed as a global ETF, IOO is not actually that geographically diverse. IOO’s holdings are predominantly headquartered in the United States, with much less representation elsewhere. Investors should therefore recognize that the international prevalence in this ETF is minimal and might not impact returns that significantly.

Opportunities

Significant stakes in both Apple and Microsoft allow this ETF to possibly benefit from the expansion of the artificial intelligence industry. This expansion is primarily driven by giant-cap tech companies that are focused on either creating their own artificial intelligence system or heavily investing in someone else’s. IOO could therefore profit from the popularization and development of artificial intelligence. I addressed this trend in greater detail when covering iShares Global Tech ETF (IXN).

Increased energy trade with Europe has also strengthened the U.S. Dollar, putting pressure on inflation and gradually contributing to economic recovery in the United States. Energy trading, even with foreign countries, forces exchange of the U.S. Dollar because it’s the reserve currency for energy. Improving economic conditions in the United States could benefit the majority of the companies held in IOO, ultimately increasing investors’ returns.

Threats

The ongoing tensions between Russia and Europe could potentially escalate as the war in Ukraine continues. The European Union has before criticized Russia’s human rights record, including their questionable treatment of journalists and non-Russian political figures. These geopolitical tensions could negatively impact European companies held in IOO, as increasing political pressures from Russia could interfere with the flow of business and eventually hurt profits.

IOO is also associated with currency risk in the U.S. Dollar for investors outside of the United States. Though the strengthening of the U.S. Dollar has benefits like fighting inflation and increasing return on foreign investments, the benefits are not the same for those outside the United States. For these individuals, returns are converted into their home currency, which is subsequently worth fewer U.S. Dollars. This potential drop in returns could reduce the appeal of IOO to foreign investors

Conclusions

ETF Quality Opinion

I believe that IOO is a high-quality ETF that will likely have significant opportunities for profit in the long-term. Such opportunities include increased energy trading between the United States in Europe as well as tech giants’ investments in the growth of artificial intelligence. However, given that one can attain similar benefits and a risk premium with an S&P 500 ETF reduce my enthusiasm towards this ETF.

ETF Investment Opinion

IOO is a Hold for now and probably for the next few years. I believe those who currently own this ETF will eventually profit from economic recovery in the United States. However, this ETF is not worth buying at the moment as I believe it still has several bearish periods ahead before it begins to reap the benefits of easing inflation and improving market conditions. Lastly, a Hold seemed to be the appropriate rating as I also believe one would likely be better off investing in an S&P 500 ETF like SPY or VOO rather than IOO.