When it comes to choosing the right Exchange-Traded Fund (ETF) on the Australian Securities Exchange (ASX), two popular options stand out: iShares S&P 500 ETF (IVV) and Vanguard MSCI Index International Shares ETF (VGS).
Both ETFs offer exposure to global markets, but they differ in terms of diversification, fees, and geographical focus. This article will help you decide which ETF is the better buy right now by comparing their key features.
What is IVV?
The iShares S&P 500 ETF (IVV) is designed to track the performance of the S&P 500 Index, which includes the top 500 companies listed in the United States.
This makes IVV heavily focused on U.S. equities, providing exposure to some of the largest and most successful companies globally, such as Apple, Microsoft, and Amazon.
Key Features of IVV:
- Management Fee: 0.04%, one of the lowest in the market.
- Top Holdings: Apple, Microsoft, NVIDIA.
- Geographical Focus: 100% U.S.-based.
- Number of Holdings: 503 stocks.
- Dividend Yield: Approximately 1.24% annually.
IVV is a great choice for investors who want concentrated exposure to the U.S. market, particularly in large-cap tech companies that have driven significant growth in recent years. Its low management fee also makes it an attractive option for cost-conscious investors.
What is VGS?
The Vanguard MSCI Index International Shares ETF (VGS) tracks the performance of the MSCI World ex Australia Index, offering exposure to a broad range of developed markets outside Australia.
This includes countries like the United States, Japan, and the United Kingdom. The ETF provides a more diversified portfolio compared to IVV by investing in over 1,300 companies across multiple countries and sectors.
Key Features of VGS:
- Management Fee: 0.18%, higher than IVV but still competitive.
- Top Holdings: Apple, Microsoft, Amazon.
- Geographical Focus: Global, with major allocations to the U.S., Japan, and Europe.
- Number of Holdings: Over 1,300 stocks.
- Dividend Yield: Approximately 2.14% annually.
VGS is ideal for investors looking for global diversification beyond just U.S. equities. While it has a significant portion allocated to U.S. companies (around 70%), it also provides exposure to other developed markets like Japan and Europe.
Performance Comparison
In terms of performance, both ETFs have delivered strong returns over recent years:
- In 2023, IVV returned approximately 20.14%, while VGS delivered a slightly higher return of 22.93%. This reflects renewed investor confidence in global markets following economic recovery.
However, it’s important to note that past performance does not guarantee future results. Both ETFs have shown resilience during market downturns and have benefited from their exposure to strong-performing companies in sectors like technology and healthcare.
Diversification: U.S.-Focused vs Global Exposure
One of the key differences between these two ETFs lies in their diversification:
- IVV is highly concentrated in U.S. equities, with its top 10 holdings accounting for over 35% of its total portfolio. This means that while you get exposure to some of the best-performing companies globally, your investment is heavily reliant on the performance of the U.S. economy.
- On the other hand, VGS offers broader diversification across more than 22 countries and various sectors, with its top 10 holdings making up only about 23% of its portfolio. This reduces risk by spreading investments across multiple regions and industries.
For investors who prefer a more balanced approach with less reliance on any single country’s economy, VGS may be a better option.
Fees: Low-Cost vs Moderate-Cost
When it comes to fees:
- IVV stands out with an ultra-low management fee of just 0.04%, making it one of the cheapest ETFs available on ASX.
- VGS has a higher fee at 0.18%, but this is still considered competitive given its global diversification.
If minimizing costs is your top priority, IVV is clearly the winner here.
Which Should You Choose?
Choosing between IVV and VGS depends on your investment goals:
- If you want concentrated exposure to high-performing U.S.-based companies with minimal fees, then IVV could be your best bet.
- If you prefer broader global diversification that includes other developed markets like Japan and Europe while still maintaining significant U.S. exposure, then consider investing in VGS.
For many investors, combining both ETFs could provide a balanced portfolio—taking advantage of IVV’s low fees and strong U.S. market exposure while also benefiting from VGS’s global diversification.