Many ion storage compounds used for electrodes in Li-ion batteries undergo a first order phase transformation between the Li-rich and Li-poor end-members during battery charge and discharge. This often entails large transformation strains due to lattice misfits, which may hamper charge and discharge kinetics. Iron(III) hydroxide phosphate, Fe_2–y(PO₄)(OH)_3–3y(H₂O)_3y−2 is a promising new cathode material with high Li-ion storage capacity, low production costs and low toxicity. Previous reports on this material indicate that the Li-ion intercalation and extraction in this material is accompanied by a second-order solid solution transformation. However, direct information about the transformation mechanism in Fe_2–y(PO₄)(OH)_3–3y(H₂O)_3y−2 is lacking, and several details remain unclear. In this work, Fe_2–y(PO₄)(OH)_3–3y(H₂O)_3y−2 is prepared by hydrothermal synthesis and characterized structurally, morphologically and by electrochemical analysis (galvostatic cycling and cyclic voltammetry). A wide range of synthesis conditions is screened, which provides information about their correlation with chemical composition, crystallite size, particle morphology and electrochemical performance. The phase transformation mechanism of selected materials is investigated through synchrotron radiation powder X-ray diffraction collected during galvanostatic discharge–charge cycling. This confirms a complete solid solution transformation both during Li-insertion (discharge) and -extraction (charge), but also reveals a highly anisotropic evolution in lattice dimensions, which is linked to an irreversible reaction step and the high vacancy concentration in Fe_2–y(PO₄)(OH)_3–3y(H₂O)_3y−2.