Stocks In Focus: iShares S&P 500 ETF

0:29A listener production. mug. You do have to hear me speak though. So either way, thank you for spending the time because the key point here, it's not actually about me. It's about my guests. And in this case, Motley Fool Analyst and Portfolio Manager, Chris Copley. Chris, g'day. G'day, Scott. How's it going? Mate, very, very well. Thank you. I will say, by the way, before we kick off, this is general advice only. We don't give personal advice. We can't tell you what you personally should do. Whether you're watching or listening to this, you need to make that decision. Chris will share with you some thoughts about an investment, but what you do with that information is up to you.

1:01We can only give general advice. Secondly, this is a point in time. We're doing this. We're recording this about the middle of April, give or take. April 2025, by the way, the internet's forever. So if you're looking at this years later, April 2025 was when we recorded it and they reflect the circumstances and Chris's views at the time of recording. They can change, sometimes a lot, sometimes a little, sometimes not at all. But just please be mindful. We're not going to provide ongoing guidance as a matter of course on these videos. Occasionally, we'll cover the same company. But what we're really saying is we're trying to give you some information here, and you can do what you want with that information.

1:35Hopefully, you know that by now, but just worth putting that out front before we get on with it. Last thing for me before I go to Chris, who's frankly much more interesting to listen to than me, please do us a favour. If you're watching this on YouTube, please like the video, please hit the subscribe button. And if you want more from us, we're going to release at least two videos a week. That's the plan for the foreseeable future, up to four some weeks. So hit the subscribe button so you subscribe to the channel. And then the notification bell, the little alerts bell, that means YouTube will send you a push notification.

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2:39Mate, tell us what it is. Tell us the code and tell us how it was made up. Yeah. So it's the iShares S &P 500 ETF. So the ticket code is IVV. And so essentially, Yeah, so it's an ETF. And first of all, it's great to see that over recent years, ETFs have become far better recognized, far better understood by many individual investors. And it is a fantastic way for people to invest and get exposure to equity markets. So for those of you who already know all of this about ETFs, which I'm sure as many of you bear with us for a few brief definitions first. But essentially, so an ETF, it's an exchange traded fund.

3:16And essentially, it's an offering which allows investors to hold a number of different investments, all neatly wrapped within one fund, which you can purchase on the ASX. So in this particular case, the iShares S &P 500 ETF is what you call an index fund. So instead of the fund investments being selected by a fund manager who makes their own active investment decisions on, well, I include this or not include this particular stock in a particular fund, an index ETF doesn't have a fund manager who makes active decisions. Instead, they simply just track the investments of a specific index, which in this case is the S &P 500 index, which tracks the performance of the largest 500 companies essentially on US stock exchange.

4:07So a few things about the iShares S &P 500 ETF. One is that it has a very low management fee of around 0.04 % per annum. And its largest positions are companies which pretty much all of us know and use all the time. So companies like Apple, Amazon, Microsoft, Alphabet, which owns Google and YouTube, Meta, which owns Facebook and Instagram, Tesla, Warren Buffett, Berkshire, Hathaway, Visa, Mastercard, the list goes on. But let's just say it holds many of the world's arguably best businesses because so many of them are sitting within US markets. And this ETF allows you to invest in all of these businesses at once with a single trade.

4:51And that trade on the ASX too, which is important, right? So, yes, it's impacted by currency. You don't have to change currencies. You don't have to open an international brokerage account. You don't have to be up at midnight trying to place your trades during the day. you can buy and sell this on the ASX the way you would an individual share, your share of company stock. But in this case, you're getting that fund, that index fund, as you say. By the way, I know you said this, Matt, but I'll just outline it for our viewers and listeners. 0.04 % is$0.04 for every$100, which is extraordinarily cheap.

5:23I mean, talk about, you know, Chris, I'd probably have to tell you about$0.02 coins. I'm old enough to remember it, but you would need the copper coins to pay your fee on$100 worth of investment in this particular ETF. So really, really cheap, as you say, both in absolute and relative terms, and a great way to get access to some of those biggest and best. It's a pretty good roll call, mate, by the way. You think about some of those names and you rattled them off and you did it beautifully, but even individually, you kind of stop and go, hang on, Apple and Amazon and Alphabet and Berkshire Hathaway.

5:52I mean, the list of those companies, I own some of those for the record, the list of those companies is just a really impressive and incredible way to be able to take advantage of some of those best businesses in the world, as you say, right here on the ASX, which might be part of the pros of an investment. But let's go through the pros and the cons. An S &P 500 ETF, what are some of the pros? What are some of the reasons that some of our viewers and listeners might think, you know what, I like those things. Those are the reasons I might want to invest in this particular ETF. Yeah, absolutely.

6:20And I'll just echo, I guess, the two that you touched on very quickly. They're incredible businesses listed on the US stock exchange, so why wouldn't you want exposure to them? That's certainly one point. Simplicity, you mentioned it before, and I guess I'll just add as well, you don't need a W8BEN form to invest overseas. And for those of you who haven't invested in individual stocks in the US or outside of Australia, this is a form that you need to fill out if you aren't a US taxpayer to invest in US shares. And it's not an overly complicated form, but it's something which does provide a bit of a barrier for some investors who are looking at investing in US-listed companies.

6:54So, you know, you could do this all on the ASX simplicity. It's great. So, yeah, that's certainly another benefit. Arguably the most important consideration though is diversification. So you get exposure to lots of investments all in one product, obviously, but beyond that, investing in ETFs, which give you an exposure outside of Australia, which this ETF does, I think can also be very important for many investors because, you know, after all, you have your job here, you have your home here. Do you want to have 100 % of your investments here as well? I think that's definitely a question worth considering.

7:26Some other points around diversification is even though the S &P 500 is an index of US-listed investments, it very much adds a bit of a global exposure as well. So, in fact, I think it's somewhere around 30 % or so of total revenues from companies in the S &P 500 actually comes from outside of the US. So, another little layer of diversification there as well, which is great. I think it's also important to point out that it also helps you diversify away from the industry exposures that we have here on the ASX. So the ASX has financial services companies and material companies. They make up about 50 % or so of the index.

8:04I think your big miners, your big banks, essentially, they make up a significant proportion of what we have here on the ASX. The S &P 500, on the other hand, technology companies are by far and away its largest industry, tightening exposure at around 30 or so percent. And many of these companies, which we mentioned before, have attractive growth prospects, very strong competitive positions and long growth runways. So there's certainly some attractive businesses at the higher end of the index as well. Another positive that I'll add for this particular ETF, as we were talking before, is it comes with one of the lowest fees that you'll be able to find in an ETF or any fund manager.

8:46And this is certainly a benefit of investing in index-focused ETFs as well, as opposed to actively managed ones, for example, because it requires less resources to manage and therefore costs can often be lower. And it means that fees aren't eating into as much of your returns over time, which is very important when you invest in ETFs. and there are certainly lots of benefits to investing in an index ETF, a lot of benefits to investing in US markets. And yeah, I guess a US-based ETF is a great investment for people to consider. Nice, man. This is a really, really good summary. And yeah, it is a great way, great one-stop shop for all the reasons you've just highlighted, which I think are awesome.

9:31That being said, we always try – no, I've said this before. The model is we don't try and be balanced. We don't try and do a 50-50, you know, half the time for the flatters is half for the round earthers. But even when we like a company, this is not a recommendation, by the way, but even when we like a company, we always share with our members risks and when we'd sell or some version of that headline that they're heading. The idea here is we say, look, here's what we like it. We actually do like it, but there's some downsides as well. And we want you to be aware of those so that if the investor doesn't work out, if things start to turn for the worse, you've been forewarned, you've been forearmed.

9:58Now, again, this isn't a recommendation, but we will look at the pros and the cons. Before I do, I want to also, this is not an ad, by the way, but for anyone watching or listening, Chris runs our Motley Fool service called Stars and Stripes. It's based on US individual companies, not ETFs, by the way. But Chris, very, very familiar with the US market, very familiar with some of the best US companies. Not an ad, but sometimes it's important to just let people know when you hear and see people talking, you go, hang on, why are they talking about this? What do they know about that? In Chris's case, the answer is he spends a lot of time, the vast majority of his time, looking overseas at the US markets and finding individual market-beating companies for our members.

10:32But of course, if you do that, the quality of the exchange. You're able to give a considered view on things like the S &P 500 ETF. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

10:49Why would investors consider not investing in the S &P 500 ETF? Yeah, so I guess the first negative is this is an unhedged ETF. So it essentially means that that a decrease in the value of the US dollar relative to the Australian dollar will impact negatively on returns. I'll probably start this by saying I'm no currency trader, so take from this what you will. But I will say that the US dollar to Australian dollar exchange rate is sitting at historically quite low levels. Purchasing power parity as well, which suggests that goods in one country should have the same price as the same good in another country adjusting for the exchange rate also suggests that the US dollar is overvalued as well at the moment.

11:33So, you know, if the exchange rate does mean revert over time, then currency will cause some headwinds for overall returns in an Australian dollar perspective. So that's certainly something to consider. There are actually hedged ETF options which you can purchase, but the downside to that is it does cost money to hedge. So that does eat into your returns as well. On the downside, downside for investors is that the S &P 500 pays out a smaller dividend than the ASX on average. So for Australians as well, we get the benefit of franking credits on dividends too, which you don't receive on US dividends.

12:08So for investors who are looking for income, you will get less of it here. Another risk that I'll mention at the moment is valuation. So even after the decline in the market over the last couple of months or so, the forward price to earnings ratio of the S &P 500 is still sitting at a level which is just about higher than any time between the dot-com bubble and the COVID outbreak. So even with a little bit of uncertainty right now around tariffs and its potential impact on the US economy, there are still some reasonable growth expectations priced into many of the major companies within the S &P 500 ETF.

12:46So this doesn't at all mean that it's not an attractive investment right now. But I guess to set the expectations a bit, I think there are certainly risks that the return over the next five to 10 years may not be quite as good as what we've seen over the last five to 10 years or so. In fact, it was Bo and Buffett that said stocks cannot forever outperform their underlying businesses. So, you know, in other words, the last 10 years or so, we've gotten two bites of the cookie. We've got the big bite, which is always, you know, the underlying growth of our investments. And then we've got a second smaller bite, which comes from investors being willing to pay a little bit more for the investment.

13:20But on average and over time, you're likely just to get that one big bite. So that's another, I guess, risk for investors to consider at the current time as well. Nice, but that's a really, really good summary. Of course, some of these things can go both ways. Value rates can go up, the currency can go down, but it is something to be mindful of. You're not dealing with the foreign exchange yourself. You're not exchanging your Australian dollars for US dollars, but you are using your Australian dollars to buy US dollar assets at the prevailing price. So that changes as well. Then you have the overlaying, as you said, the business fundamentals.

13:51So there's a bit to think about. Also, on the pro side, though, as we said, some of the opportunities there. Mates, I will ask you to kind of not give us a formal recommendation. We don't know. We don't do that in this space that stocks in focus. What we do, though, is ask our team, what do you reckon the odds are of market outperformance from here? Now, when I ask that question, for those who are new to this series, is the only for we are long-term investors. Our time horizons are usually five years plus. For some of us, even longer than that. So I'm not saying we're not asking the next three months or six months or 12 months or two years or three years.

14:21We're really saying if you're going to put your money down, invest, which by definition should mean long-term investing. We want to try and get a return that beats the market, right? In most cases, some people want to invest for income, other things as Chris has already mentioned. But given all those things we've talked about, the pros and the cons, the circumstances surrounding this ETF, the benefits of them, what do you reckon the odds are? of the S &P 500 ETF by beta shares, IVV is the code for those who are wanting a reminder. What do you reckon the chances are of that beating the market from here over that long term?

14:52Yeah. So as you mentioned, it could go either way, of course, but I guess there's a chance that currency could make it a bit harder to outperform. I think the higher multiple might make it also a little bit harder to outperform than it has in the past. I mean, if you look at the last five to 10 years, the S &P 500 index has beaten the ASX by quite a considerable margin. What I will say, though, is I believe that the major positions within the S &P 500 will continue to grow at a more compelling rate than the major positions on the ASX, just due to the nature of the companies and the industries that they operate in.

15:24If I had to pick which one would outperform over to, say, a three to five-year period, I think it's probably a bit of a toss of the coin. I wouldn't be confident either way. But if I had to go out 10 years or so, I would lean towards towards the iShares S &P 500 portfolio outperforming the ASX just due to the nature of the higher quality businesses operating larger growth opportunities. And over time, I think that the growth will outweigh all the other potential downside risks and it will outperform the ASX over time. Beautiful. Thank you, Chris. There you go. If you're not sufficiently diversified internationally by currency, geography, industry, if you want some access to some of the best companies on the planet, as Chris has mentioned, maybe the iShares ETF might be for you.

16:08But bear in mind, Chris's comments about the potential upsides and the potential downsides, particularly around valuation and currency. Keep those things in mind. And of course, as always, stay long-term as investors. That's our greatest exploitation to anyone watching or listening right now. Chris, thank you for sharing your expertise with us. Thank you for you who are watching or listening to this. Remember, we're on YouTube and the Motley for Money podcast. If you've heard us in our ears, jump over to the podcast, subscribe there. If you're on the podcast, you haven't yet checked out the YouTube channel and do that.

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