How Micron Became 25% of a Value ETF

Value ETFs are associated with holding established, slow-growing companies and those that have fallen out of favor. That typically means they avoid fast-growing highflyers.

IShares MSCI USA Value Factor ETF VLUE has broken that stereotype. Its 82% total return over the past year through Friday made it the highest performing large-value fund over that period. Its total return ranked in the top 100 of all US mutual funds and exchange-traded funds, which includes highly concentrated funds and leveraged trading tools.

It has been a top performer over the past year because it had a large position in one of the market’s hottest stocks. As of Friday’s close, it held 24.9% of its portfolio in a single technology stock: Micron Technology MU. Micron’s price has surged 800% over the past year, driven by strong demand for memory-related semiconductor companies.

1-Year Cumulative Return: VLUE Versus Large-Value Category Average

Micron isn’t a stranger to value ETFs. The stock has crept into roughly one-fourth of large-value funds, including iShares Russell 1000 Value ETF IWD and Vanguard Value ETF VTV

. None holds a larger stake than VLUE. By comparison, VTV held just 4% of its portfolio in Micron, and even a semiconductor ETF like iShares Semiconductor ETF SOXX only allocated 9%.

Why So Much Micron?

Three features of the ETF’s process have created a perfect storm for Micron to balloon within its portfolio:

• It keeps its sector weightings close to the broader market;
• It incorporates a forward-looking value metric;
• It doesn’t limit the weighting of individual stocks.

Pegging sector weightings to the broader market is the biggest driver of Micron’s large position in VLUE. Technology stocks occupied roughly 40% of the parent index’s portfolio before the May 2026 rebalance. That means the ETF needed the same allocation. However, chasing cheap stocks weeded out about two-thirds of the least value-oriented stocks from the MSCI USA Index. So, it had fewer stocks remaining to build that 40%.

Big names like Nvidia, Apple, and Microsoft fill the parent index’s tech sleeve. The value index holds none of those names, leaving behind a vacuum that had to be filled with smaller rivals.

A large tech sector is not the only factor at play here. The ETF’s target index uses three data points to calculate a value score and select stocks: enterprise value/operating cash flow, price/book value, and forward price/earnings. That last metric is responsible for Micron’s membership in the index.

Micron experienced a massive price increase over the past few months, which would normally increase its forward P/E ratio. But the only thing that has grown more than Micron’s price has been its projected earnings. The two combined to create a low forward P/E ratio, which made Micron look attractive as a value stock. Micron qualified for the portfolio but represented less than 2% of the starting universe.

The index then multiplies each stock’s market cap by its value score to determine its weighting in the portfolio. Micron has one of the largest market caps of the tech companies in its portfolio and a sufficiently high value score. That combination further caused its weighting to balloon in the ETF.

While these circumstances are rare, the index has no constraints to control the weightings of large single stocks in the portfolio.

Why It Matters

An ETF with roughly one-fourth of its assets in a single stock carries a very different risk profile than a more broadly diversified ETF. In this case, Micron’s strong performance has contributed to its large position in the ETF, making the fund more dependent on its future performance. It could take an outsize hit if sentiment toward Micron reverses or if the company’s fundamentals deteriorate.

Another risk is related to how the ETF’s income gets taxed. Mutual funds and ETFs that qualify as diversified investments don’t pay taxes on the income or dividends that their stocks and bonds throw off. Instead, they pass along the income to investors who pay the tax bill. That’s favorable to investors because the income only gets taxed once. In the current situation, VLUE qualifies as “diversified” if its largest stock represents 25% or less of the ETF.

An ETF that loses its “diversified” status also loses that benefit, and it must pay taxes on the income from its underlying stocks and bonds. The remaining income still gets passed along to investors, who also owe taxes. In other words, the income gets taxed twice when an ETF’s largest stock crosses the 25% threshold, causing it to fail the diversification test.

There is a gray area to consider. The IRS applies the diversification test only once per quarter. Furthermore, BlackRock can steer the ETF away from those tax liabilities by keeping the ETF’s stake below the 25% threshold, even if that means incurring some tracking error along the way. It has already modified the ETF’s prospectus to address this risk. Complying with diversification rules doesn’t mean the ETF is without risk, however. Investors are still heavily exposed to Micron’s price movements.

A long-term solution is still in the works. Changing the index’s rules or switching to a different index are just two examples of potential solutions. But such changes require additional turnover and trading, and they alter what investors initially signed up for.