Approach
IVV tracks the S&P 500, a free-float, market-cap-weighted benchmark composed of large-cap US equities. Constituents are determined by a set of criteria and an index committee. The minimum market cap for companies in the index is about USD 5 billion. A slight quality tilt exists because of its conservative eligibility requirements pertaining to unprofitable companies and recent IPOs. Moving away from the cross-listing structure in September 2018, IVV now invests directly into a US-listed version of the strategy. Although it lacks exposure to small and mid-caps, the constituents of this index account for about 80% of the total market cap of the US stock market. Portfolio turnover is expected to be very low, in line with the underlying index. IVV distributes quarterly. IShares can reinvest dividends. Also, the underlying US-listed version engages in securities lending, adding some incremental returns to the Australian vehicle’s overall performance. In terms of its portfolio role, the ETF can be used as a core international equity holding, although it should be paired with an ex US equity offering for full global exposure.
Portfolio
The ETF mirrors the composition of the large-cap market, allowing the market to dictate its stock and sector weightings. This allows the ETF to harness the market’s collective view about the relative value of each stock and keeps turnover low, which is among the lowest in the category. As of 28 Feb 2022, the strategy’s top 10 holdings account for about 28% of the total assets, and the largest holding (Apple) accounts for 6.9% of assets, which effectively diversifies firm-specific risk. Information technology has been the largest sector exposure within the index (25.6% as of 28 Feb 2022), reflecting the dominance of tech stocks over the US large-cap space; however, it is underweight compared with the category average.
The strategy is slightly underweight in technology, consumer cyclical, and communication services and overweight in financial services and healthcare compared with the average rival. The strategy has substantial indirect global exposure given the significant stakes it holds in several multinational companies. With a large chunk of the underlying companies’ asset-weighted revenue generated outside of the US, this feature adds to the geographic diversification of the ETF. The strategy is large-cap-focused with no small and mid-caps within its constituents.
People
We are impressed with the management team and believe BlackRock’s vast resources give it an advantage. Day-to-day management of the Australia-domiciled ETF is shouldered by Derek Dei and his team located in Hong Kong. The team is responsible for overseeing more than 60 index funds and ETFs operating in the Asia Pacific region. However, the underlying US-listed ETF is managed by Alan Mason and his team of four portfolio managers based out of the US. Mason is the longest-tenured member of the team and has served as a portfolio manager at the firm since 1991. Greg Savage deals with multi-asset strategies, Jennifer Hsui monitors emerging-markets funds, Rachel Aguirre has responsibility for the institutional developed-markets and US funds, and Amy Whitelaw oversees North America and Latin America ETFs.
These managers interact with a wider team of traders and managers around the globe to execute the fund’s day-to-day operations. The impact of personnel turnover is minimal when it does occur. Most of the portfolio management process is automated, and portfolio managers primarily review and approve trades prior to and after execution. The team employs BlackRock’s Aladdin platform to deliver much of its portfolio management tasks. Global trading desks allow traders to conduct foreign transactions in a cost-effective manner, and the team has maintained tight index tracking
Performance
VV seeks to deliver the risk/reward profile of the US large-cap equity market via tracking one of the most popular indexes, the S&P 500. In the process, it sets a high hurdle for active managers to beat. BlackRock employs its sophisticated portfolio management systems and trading capabilities to emulate the risk/reward profile characteristics of the S&P 500, achieving low tracking error against the index. Over the trailing 10 years through 28 Feb 2022, the ETF has outperformed the category average by 67 basis points per year, with lower volatility. Much of this outperformance can be attributed to the strategy’s cost advantage; lower-thanaverage cash drag; and more favorable stock exposure in the technology, utilities, consumer cyclical, and consumer defensive sectors compared with the category average. IVV has held up as well as most of its peers during downturns since inception, despite its lower-than-average cash balance. Most actively managed strategies in the category keep larger cash balances on hand to meet redemptions, helping out during bear markets.
About Fund:
As the uptake for US large-cap equities increases, particularly through the passive route, iShares S&P 500 ETF IVV continues to be a very good investment on the back of seamless execution at an unmatched fee. The strategy is expected to outperform its peers over the long term and remains the clear choice for investors to gain US exposure. The underlying benchmark, the S&P 500, is a market-cap-weighted index of the largest 500 companies in the United States. Thus, it offers giant- to mid-cap exposure, covering about 80% of the free-float-adjusted market capitalisation of the US equity market. This results in a well-diversified index, at the stock and sector levels. As such, passive strategies that track the S&P 500 stand as above-average options in a market segment where active managers have generally struggled to outperform. Consisting of highly liquid stocks, material stock-specific valuation information is quickly incorporated into stock prices.
From an Australian perspective, IVV gives exposure to a broad portfolio of some of the world’s most noteworthy companies, including sectors that are underrepresented in Australia, such as technology and healthcare. The S&P 500’s correlation to Australian equities has come down in recent years, effectively adding to diversification for Australian equities exposure. This vehicle invests into the US-listed version, which engages in securities lending to garner some incremental returns.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.