IVV provides exposure to some of the world-leading businesses including Apple, Microsoft, Amazon, and Tesla in one simple product. It has proven the ability to outperform 75.27% of active strategies. We are bullish on IVV and own a large amount in our portfolio, which has made me excellent capital gains.
Should I buy IVV ETF?
Should I Buy IVV ETF: Pros and Cons
- Exposure to Some of the Biggest Global Companies
- Low-cost Broad Exposure to US stocks
- Great Historic Returns
- Australian Domiciled (No W-8BEN)
- Tax Effective
- US Only* (Can be seen as a positive)
- Equities Only* (Can be seen as a positive)
- Currency Risks
- Relatively High PE Allocation
Who Should Buy IVV Shares?
IVV is used by many investors to gain exposure to a broad basket of the biggest US companies in an efficient manner. It can be suitable for beginners and advanced investors to add US equity diversification to a portfolio, including some biggest global brands like Apple, Microsoft, Facebook, Google, and Tesla.
Why Should I Buy IVV?
- Exposure to large, established U.S. companies
- Low cost access to the top 500 U.S. stocks in a single fund
- Use to diversify internationally and seek long-term growth opportunities in your portfolio
The fund may be used by itself or in conjunction with other funds depending on your portfolio goals. Here are some popular ideas of how it can be used in a portfolio: Creating The Ultimate ETF Portfolio
Should I Buy IVV ETF: Facts
|Benchmark||S&P 500 Index|
|Number of Holdings||1* (505)|
|Assets Under Management||$4.8B|
|Inception Date||10th Oct 2007|
|Distribution Reinvestment Plan||Yes|
|Total 10-Year Returns||19.90% p.a|
Should I Buy IVV: ETF Price
IVV has had an excellent share price history of solid, uninterrupted returns. Should I buy IVV Shares?
About IVV ETF ASX
The iShares S&P 500 ETF or IVV is the largest US equity ETF available on the ASX by assets under management (AUM). The fund was started on 10th Oct 2007, before the GFC crash, as a result, we see its returns since inception doesn’t appear as impressive as its rivals (6.06% pa).
IVV is available on both Australian and US exchanges. The Australian fund has an AUM of $4.985 Billion, the US fund has an AUM of $303.314 Billion. Together the IVV fund totals $308.3 Billion in Assets.
The ETF is a passive index fund tracking the S&P 500 Index. The Fund invests in a diversified portfolio of securities, which means the Fund is less exposed to the performance fluctuations of individual securities. The fund takes a passive investing approach, which has been shown to outperform Active investing.
The Index is a float-adjusted, market capitalization weighted index, which includes 500 leading US companies with a market capitalization of at least US$8.2 billion.
IVV is used by many Australian investors to gain exposure to the High Performing US Market, including some of the biggest global brands.
IVV Share registry: Computershare. Through Computershare, you can manage your holdings and communications, and also select whether or not to reinvest distributions.
IVV is domiciled in Australia (as of 2018) meaning it is a registered fund in Australia for tax purposes. Investors who buy into this ETF, and are Australian residents for tax purposes, will be subject to Australian taxes and regulation. Because of this investors have no need to complete a W-8BEN form, like VTS which isn’t domiciled in Australia. So should I buy IVV?
Blackrock and iShares
IVV is an ETF managed by iShares, a division of the BlackRock group. iShares was originally created by Barclays as a direct competitor to State Street. The fund was later sold to BlackRock for around $20.1 Billion in 2009.
BlackRock is the largest Fund Manager by AUM, with around $9 Trillion in Assets Under Management. Vanguard is a close second with $7 Trillion.
Should I Buy IVV: Portfolio Goal
The fund aims to provide investors with the performance of the S&P 500® Index, before fees and expenses. The index is designed to measure the performance of large-capitalization US equities. Source, iShares
Should I Buy IVV: Attributes
|Currency Hedged Fund||No|
|Synthetic Replication Fund||No|
|Has Dividend Investment Plan||Yes|
|Socially Responsible Fund||No|
The IVV ETF is a non-leveraged index fund, which has no currency hedging. The currency-hedged alternative is IHVV. The fund does not use synthetic assets, meaning it owns the underlying shares.
IVV being a passive index fund does not discriminate a company based on business activity. Approximately 2.9% of the fund operated in an ESG controversial space.
IVV’s Benchmark Index: The S&P 500
IVV is benchmarked against the S&P 500. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
The index is widely regarded as the best single gauge of large-cap U.S. equities.Standards and Poors
Standards and Poors 500 is a market-capitalization-weighted index, meaning each company included is in proportion to the float market value.
The index is also float-adjusted, meaning that the index only counts those shares that are available to investors and excludes closely-held shares or shares held by governments or other companies.
The index was created by Standards and Poors (S&P) on March 4th, 1957.
S&P 500 Methodology
- Eligibility Market Cap: Market capitalization must be greater than or equal to US$13.1 billion, and must have a float-adjusted market cap that is atleast 50% of the underlying minimum market cap threshold.
- Public Float: Companies must have an investable weight factor of at least 0.10.
- Financial Viability: Companies must have postive as-reported earnings over the most recent quarter, as well as over the most recent four quarters (Summed together)
- Liquidity and Pricing: The ratio of annial dollar value tarded (average closing price over the period multipled by historic volume) to floar-adjusted market capitilsation should be at least 1.0, and the stock should have a Minimum monthly trading volume of 250,000 shares in each of the six months leading up to the evaluation date
- Universe: The company must be from the U.S.
- Sector Representiation: Sector balance, as measured by a comparison of each GICS sector’s weight in an index with its weight in the S&P Total market Index, in the relevant market capitisation rangem is also considered in the selection of companies for the indices.
- Company Type: All eligible US common equities on eligible US exchanges can be included, REITs are also eligible for inclusion. Securities that are ineligible for inclusion in the index are limited partnerships, master limited partnerships and their investment trust units, OTC Bulletin Board issues, closed-end funds, exchange-traded funds, Exchange-traded notes, royalty trusts, tracking stocks, preferred stock, unit trusts, equity warrants, convertible bonds, investment trusts, American depositary receipts, and American depositary shares. Source: Standards and Poors
Should I Buy IVV: Holdings
Due to the nature of the US economy, IVV is weighted towards the technology sector. We can see in the Morningstar sector graph below that Information Technology accounts for 27.8% of holdings. In our top 10 holdings, eight of the constituents are technology-based. These eight holdings account for 25.33% of the entire index.
Due to its large dependence on technology IVV can be seen as a great way to diversify from Australian holdings. With technology businesses being very very under-represented within the ASX accounting for only 4.41% of holdings.
Should I Buy IVV: Top 10 holdings
- Apple (6.1%)
- Microsoft (5.94%)
- Amazon (3.75%)
- Facebook Class A (2.3%)
- Alphabet Class A (2.24%)
- Alphabet Class C (2.13%)
- Nvidia (1.45%)
- Berkshire Hathaway Class B (1.42%)
- Tesla (1.42%)
- JP Morgan Chase (1.29%)
The top 10 holdings represent 28.04% of the total ETF. Here’s the full list of current holdings.
IVV ETF Morningstar Sector Weightings:
IVV ASX Asset Class exposure
|Equity||ISHARES CORE S&P 500 ETF||99.98%||$4,989,437,592.12|
IVV ASX Geographic exposure
Should I Buy IVV ETF Fees
- IVV Management Fee: 0.04% p.a
- Indirect Costs: 0%
- Bid/Ask Spread: 0% (Averaged over 30 days)
How Are IVV Management Fees Paid?
Management fees are automatically deducted from the fund’s Net Asset Value on a daily basis. This means is you as an investor never have to directly send money to iShares. It is all processed by the fund as they deduct the fees from the underlying earnings/capital of the fund.
Because of this you never really notice the fees, instead, it just reduces the fund’s performance over time. When the fund sends out their AMMA statement at tax time you can see the full details of this.
IVV ASX Bid-Ask Spreads
The bid-ask spread is the difference in price between the highest price that a buyer is willing to pay for a security and the lowest price for which a seller is willing to sell it.
- The narrower the spread the better, as this reduces the trading costs associated with buying and selling ETFs
- Exchange-based spreads, as on the ASX, are set by the competitive tensions between market markers
- Larger Funds (like VDHG) will tend to have lower bid-ask spreads.
- Bid-Ask spreads are not set but constantly change throughout the day, depending on supply and demand.
Should I Buy IVV: Fee Comparison
|Average Bid/Ask Spread||–||–||–||–||0.02%||0.02%||0.04|
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Should I Buy IVV ETF: Performance
In the below table we set out the returns of IVV compared to the S&P 500 Index over various time frames. From this data, we can see the fund does an excellent job at replicating the benchmark.
We have also compared the performance of IVV to several other popular ETFs. They are expressed as average returns per annum.
|Month||1 year||3 years||5 years||10 years||Inception|
The below performance graph by iShares demonstrated the cumulative total returns of IVV over a ten-year period.
How can an ETF outperform the benchmark index?
The ETF is designed to closely match the performance of the S&P 500 index before fees. From time to time the fund may actually slightly outperform the index by a small degree, which is evident above. This is due to a combination of two reasons:
- Authorized Participant Inefficiencies
- Representative Sampling
Authorized participants are organizations that create and redeem shares of an ETF and regulate the price to the Net Asset Value (NAV), from time to time there will be random discrepancies between the ETF price and NAV. This is reduced in large efficient funds.
The second explanation and larger factor is most ETF use a representative sampling indexing strategy to manage the Fund. Representative sampling is an indexing strategy that involves investing in a representative sample of securities that collectively has an investment profile similar to that of an applicable underlying index. The ETF may or may not hold all of the securities in the Underlying Index.
Should I Buy IVV ETF: Characteristics
In this data, we can see the average fundamental factors across the IVV holdings. We can see the weighted average PE ratio is 33.24x, the price to book is 4.73x and the ROE is 29.24%.
|Return on Equity||29.24%|
|Return on Assets||10.29%|
|Earnings Yield (dividend)||1.08%|
In the below graph we see the average PE range of the S&P 500. This data can be extrapolated to IVV. We can see the average range is 15-30. In the past year, we see a massive spike in the average PE ratio. This is due to the COVID recession which saw company profits plummet as prices have since recovered. In future earnings seasons as we see profits return this PE ratio will return to the average.
Should I Buy IVV: Competitors
The main competition for IVV in the US equity space is Vanguard’s Stock Market ETF (VTS) and State Streets SPDR S&P 500 ETF (SPY).
SPY also has an ETF option domiciled in both the US and Australia. VTS is only domiciled in the US, thus investors will have to complete a W-8BEN form.
|Benchmark||S&P 500||S&P 500||CRSP US Total Market||S&P 500 (Holdings Weighted Equally)||High Growth Comp.||MSCI World ex-Aus|
|Number of Holdings||509||505||3935||506||7*||1505|
|Assets Under Management||$4.5B||$84M||$2.79B||$181M||$1.1B||$1.8B|
|Inception Date||10 Oct 2007||22 Jan 1993||8 May 2009||17 Dec 2014||20 Nov 2017||20 Nov 2014|
|Distribution Reinvestment Plan||Yes||Yes||No||Yes||Yes||Yes|
|Total 3-Year Returns||18.2%p.a||18.43% p.a||18.18 % p.a||15.42% p.a.*||11.36% p.a||13.55% p.a|
From our comparison, we can see that IVV is a much larger fund in terms of assets under management compared to its rivals. All funds have a very low turnover ratio, which can help minimize tax implications. VTS is slightly cheaper at 0.03% compared to 0.04%, making them the cheapest ETFs available on the ASX.
QUS or Betashares S&P 500 Equal Weight ETF, features the holds all equally weighted at around 0.002%. QUS is a rebranding of their previous ftse rafi US 1000 etf. The rebranding occurred in December 2020 (*3-year performance is based on theoretical performance).
Should I Buy IVV ASX Distibutions
At the current rates, IVV pays a distribution of $6.6753. This gives IVV a dividend yield of 1.08%. The distribution amount and yield are relatively low to the historical trends, this is due to the underlying equities reducing dividends during the COVID recessionary period. As profits return we will see this yield again towards its average yield of around 2%.
Since IVV holds the S&P 500, the distributions are unfranked. IVV distribution is much lower than that of VAS at around 4%. This can be seen as a positive as it makes the fund more tax effective.
IVV Distribution History (Previous two years)
|Record Date||Ex-Date||Payment Date||CPU|
As an ETF is a trust structure the fund will payout all its earnings after expenses to investors.
When does IVV pay dividends? Historically IVV pays distributions quarterly (4 times a year). The Ex-Date of the distributions is usually in January, March, June, and December. Payments are also made within these months, historically within 5-10 days of the Ex-date.
IVV investors are eligible to participate in a Distribution Reinvestment Plan (DRIP), which can be set up through the share registry, Computershare.
IVV VS IHVV: Hedging
IHVV or iShares S&P 500 (AUD Hedged) ETF is the Currency hedged version of the IVV fund. The fund goal is to minimize the impact of Australian dollar volatility on returns. The funds have a number of key differences.
|Number of Holdings||509||519|
|Assets Under Management||$4.5B||$570M|
|Inception Date||10 Oct 2007||15 Dec 2014|
|Distribution Reinvestment Plan||Yes||Yes|
|Total 1-Year Returns||32.71%||34.32%p.a|
|Total 3-Year Returns||18.2%p.a||15.14%p.a|
|Total 5-Year Returns||17.87%||15.50%p.a|
|Total 10-Year Returns||19.90% p.a||–|
Some of the key differences we notice here are the management fee and portfolio turnover. Although IHVV’s management fee of 0.10% is still very competitive, it is higher than IVV’s. To put into perspective:
- A $10,000 investment in IVV would attract an annual fee of $4
- A $10,000 investment in IHVV would attract an annual fee of $10
IHVV’s large portfolio turnover arises from the trading of currencies required to hedge to the AUD. A portfolio turnover of 29.50, tells us the fund is 29.50% different than it was 12-months ago. Since an ETF is a trust structure that must pay out earnings this can create tax burdens for investors.
IHVV Distribution and Tax Implications
2021 highlights the potential tax burden for the AUD hedged fund. In 2021 we saw a distribution yield of 20.93% for IHVV, compared to 1.08% for IVV.
On the surface, IHVV’s large distribution may seem very attractive for yield-seeking investors. However, with an ETF structure, the unit price is kept consistent with the Net Asset Value (NAV) of the fund. Meaning that when the NAV is reduced via a distribution, the price will drop accordingly. We see this evident in the graph below, with a drop of around 15%, corresponding to the latest distribution.
Due to this relationship, the distributions make no impact on the fund’s total gross returns.
Since IHVV made investors realize a large distribution, this created a tax burden that will materially impact investor’s net returns. The latest distribution comprised of the following income sources:
|Foreign Income (Net)||75.7892%|
|Discounted Capital Gains- NTAP||10.3046%|
|Capital gains – other method NTAP||3.6016%|
|CGT Concession (NTAP)||10.3046%|
From the breakdown, approximately 89.69% of the distribution would be taxed at the shareholder’s tax rate.
Assuming the distribution yield of 20.93% is all comprised of the same income sources, we can estimate how much the net yield is actually worth to investors after tax:
|Income thresholds||Rate||Net Distribution Yield After Tax|
|$18,201 – $37,000||19%||17.36%|
|$37,001 – $90,000||32.5%||14.83%|
|$90,001 – $180,000||37%||13.98%|
As we can see the tax implications have lowered the net yield significantly. As such the total net return from IHVV over the last 1-year period has actually been between 23.21% and 18.33% for taxpayers. Much less lucrative than the 34.32% gross return.
Since IVV has a significantly lower turnover, its distribution yield is much lower. Hence the tax burden is significantly less.
To Hedge or Not to Hedge?
Hedging refers to if the fund has reduced the impact of foreign currency fluctuations using hedging techniques. Consider how a currency changes when you order something from another country, in investing this can alter your returns, for better or for worse.
Many funds will have a hedged and unhedged version of the same fund, generally speaking, the hedged version will have slightly higher fees to account for the costs involved in hedging a currency.
Whether to hedge is for each investor to consider. Generally speaking, those investing for a shorter time frame or those with a lower risk tolerance may choose a hedged option to remove the currency uncertainty. For those investing over a longer-term and for buy and hold investors an unhedged option may be a better choice. As it will
attract lower fees (generally speaking), it can also add for an additional level of diversification, and currency fluctuations tend to average out over the long term.
Choosing an unhedged option can provide additional exposure to international economies and currencies.
Expanding on the additional level of diversification point, by choosing an unhedged option not only are we betting on this foreign company but also gaining exposure to their currency and the overall economy. If the AUD goes down relative to this foreign currency our investment will be worth more in AUD, and consequently, if the AUD rises against the foreign currency our investment will be worth less in AUD.
Hence consider a situation where the Australian economy experiences a recession, not only will our international investments perform strongly relative to our domestic holdings but also a fall in the AUD will cause a further boost to our returns.
For more information on Hedging, Here’s a link to Vanguard’s To Hedge or Not to Hedge Research.
IVV ETF Taxation: Why it is a tax efficient fund?
The IVV ETF is a very tax-efficient fund in comparison to alternative funds. The tax efficiency of the fund stems from several factors:
- The Funds Low Turnover
- The S&P 500’s Low Distributions
- No Currency Hedging
- The ETF’s Open Ended Structure
IVV’s Low Turnover
IVV’s Low Turnover is attributed to it being an index fund. Since index funds hold a predetermined amount of given companies it means that the companies are not rapidly brought and sold. This can be represented as portfolio turnover. IVV has a turnover rate of 0.49%. That is the underlying funds are 0.49% different than they were a year ago.
In comparison, an actively managed fund turnover rates are likely to be over 30% depending on the fund. A higher turnover rate will usually incur capital gains which can have a taxation impact on the investor.
Since IVV is also created via representative sampling and rebalanced quarterly, this means the fund doesn’t necessarily have to include or exclude holdings frequently, again this keeps turnovers low.
The S&P 500’s Low Distributions
the US is known for having growth companies that reinvest their earnings, rather than paying out large dividends. The average US dividend yield is around 2%.
In comparison, Australian shares are well known for their dividends. Due to our large well-established banking sector and imputation system our shares yield on average around 4-5%
Since US companies favor reinvesting earnings rather than paying out dividends, this makes IVV very tax effective. In theory, this allows the company to grow our investment without a personal tax liability.
No Currency Hedging
As discussed previously since IVV is not hedged to a currency this can create tax efficiencies. In 2021 we have seen a lot of examples of this, with Hedged ETF’s paying out massive distributions which can have large tax implications.
Remembering that ETFs are a trust structure, all earnings net of expenses are paid out to the investors. With frequent currency trading involved in hedging, this can create, earnings that are paid and taxed in an inefficient manner.
ETF’s Open Ended Structure
ETF’s by nature can be much more efficient than unlisted managed funds. Since ETFs are traded on an exchange and use an open-ended structure, whenever an investor sells units in an ETF they simply sell to other investors. Due to this underlying units in the fund do not have to be sold, hence no capital gains or losses are inflicted upon the fund itself.
When Authorised Participants redeem their units in an ETF, they are not paid out in the capital, but instead are paid ‘In-Kind.” This means they receive the underlying holding (or creation unit), which the AP then sells on the market themselves, and no capital gains event is realized by the fund.
SPIVA: S&P Indices Versus Active
SPIVA is a study conducted by Standard and Poor’s to determine the performance of Active Versus Passive Index Funds. This report is one of my favorite pieces of research available and largely one of the reasons that I hold a large portion of my capital in passive index funds, like IVV.
This report found 75.27% of actively managed funds fail to outperform the S&P 500 index, over a five-year period.
“Actively managed funds have historically tended to underperform their benchmarks over short- and long-term periods. This has tended to hold true (with exceptions) across countries and regions. Another recurring theme is that even when a majority of actively managed funds in a category have outperformed the benchmark over one time period, they have usually failed to outperform over multiple periods.”Source: Standard and Poors
If all these professionally managed active funds fail to beat the proven method of a buy-and-hold passive strategy, how do you think your holdings will perform?
Should I Buy IVV ETF: Prophet’s Take
IVV provides efficient exposure to the largest 500 US shares in one simple easy product. Its low-cost, tax-efficient strategy is an excellent option for investors looking for exposure to the US markets, and some of the world’s biggest global brands.
Due to the nature of the US economy, there is a large reliance on the technology sector. These businesses account for over 27% of the capital allocation. This can make the fund very desirable for Aussie investors, where the technology sector is severely lacking.
In terms of competition, IVV is the largest ASX-listed Passive US Index fund. Their management fees are very competitive. Although VTS is slightly cheaper at 0.03%, it is domiciled in the US. This means investors will need to complete a W-8BEN, form, unlike IVV which is domiciled in Australia.
I believe in the US economy and the continued performance of the S&P 500 for this reason, I am very Bullish on IVV.