Australian investors aiming to have US index fund exposure in the portfolio can use the Standard & Poor 500 which includes the 500 largest companies listed on the New York Stock Exchange and NASDAQ weighted by market capitalization.
Sector breakdown of the index shows that it is broadly diversified across a number of sectors unlike the ASX Top 200 which is heavily weighted towards financials and commodity companies.
It is the largest and most diversified US index (unlike the Dow Jones which includes only 30 stocks or the NASDAQ which are heavily weighted to technology shares).
S&P 500 Index Sector Segments
Information technology makes up the largest equity sector in the S&P 500 index, followed by financials, healthcare, consumers and then industrials.
As these are US listed companies, investors in the S&P 500 will gain exposure to US companies and their respective international exposures. (chart source: SPDR)
The S&P 500 has outperformed the ASX 200 index recently due to looser monetary policy and lessor reliance on the Chinese economy. Bullish investors on China can also use ASX China ETF.
The tailwind of depreciation of the AUD against the US dollar has added returns to those investors that allocated funds to US equity markets when the Australian dollar was near parity to the US dollar.
Year to date Sector Performances
Looking at the overall index return can miss the out performances within the individual sectors. Chart above exhibits the year to date return of the individual sectors in the S&P 500.
Financials has always includes Real Estate Investment Trust (REIT). From August 2016 the REITs will have its own GCIS classification and will stand on its own.
S&P 500 ETFs
|iShares S&P 500 AUD Hedged||IHVV|
|iShares Core S&P 500||IVV|
|BetaShares S&P 500 Yield Maximiser||UMAX|
|SPDR S&P 500 ETF||SPY|
ETF providers created a number of options for Australian investors to invest in the S&P 500 index. The primary difference between the ASX S&P 500 ETF is if you would want AUD FX exposure or not in addition to the market exposure.
IHVV hedges the value of the ETF in AUD so FX exposure is eliminated while IVV and SPY are both unhedged S&P 500 ETFs.
IVV vs SPY. Both track the same index however IVV is more liquid.
iShares Core S&P 500 ETF (IVV)
ASX IVV allows investors a direct exposure to the S&P 500.
- IVV does exactly as promised, a low cost index fund with annual management expense ratio of 0.07% per annum.
- The fund provides a unhedged S&P 500 index exposure. Total return is based on the combined S&P 500 return and changes in AUD/USD exchange rate.
- Distribution are paid quarterly. All distribution are in USD and converted to Australian dollars. Just like the change in the index fund value is impacted by variation in the Aus dollar to US. The final distribution received by investors is also dependent on the FX rate at time of payment.
- as IVV ETF provides intraday liquidity. Investors can open and close position at a time of their choosing rather than daily pricing provided by managed funds.
IVV ETF Dividend History
Recent IVV ETF dividends measured in US dollar shows a steady upward trend. Dividends paid are sum of the all the dividends paid by the underlying companies. The dividend amount in AUD broadly tracks the US dollar amount except in periods where the AUD has depreciated significantly in 2007/8 and 2014/15.
Investing IVV on the ASX provides some level of cushion during market downturn as the depreciation of the AUD would limit extent of market declines. Note as the companies are listed overseas there are no franking credit attached to any dividend from IVV.
Obviously this would have the opposite impact during periods of AUD appreciation.
As these are index fund tracking the largest and most liquid market in the world. The cost of owning these funds are relatively low where typical annual management fee is below .10% per year.
The FX hedged ETF option also include the cost of hedging however total after hedge cost for IHVV is not materially higher than the pure index tracker.
The strength of the liquidity in the index is reflected in the size of the index components. Typically, a company has to have a market capitalization of at least $2 billion market cap before it is considered for index inclusion.
The size is a stark contrast where the smallest company in the ASX 300 is usually around $100 million market capitalization.
Monthly S&P 500 Returns
Chart above shows the monthly price chart of the S&P500 index. Monthly time frame accentuate the medium and long term trend in the index over the last 7 years.
The chart below highlight the S&P 500 index returns against over global equity indices. Note the returns are all in local currencies and does not take into consideration of AUD to JPY for the Nikkei, EUR to AUD for DAX.