IVV vs VGS - An Investor's Dilemma

IVV vs VGS – An Investor’s Dilemma

The United States stock market has had remarkable growth over the past decade, even in the face of challenges such as the Covid-19 pandemic.

Despite experiencing a significant decline in the early part of 2020, the annualized 10-year total return, as of today, stands at an impressive 12.51% [1].

Similarly, the Global MSCI World ex Australia Index has delivered a 10-year return of 11.08% as of August 31, 2023 [2].

In this article, we will conduct a performance comparison between two highly popular ETFs: IVV and VGS. IVV tracks the widely recognized US powerhouse, the S&P 500, while VGS follows the MSCI World ex Australia Index.

Our analysis aims to provide a comprehensive overview of both ETFs, assisting you in determining which one better aligns with your investment objectives.

VGS Vanguard Review

Vanguard MSCI Index International Shares ETF, often referred to as VGS, is a popular choice among investors seeking exposure to global equities.

VGS closely tracks the performance of the MSCI World ex Australia Index, offering a diversified portfolio of equities from various countries and sectors.

Launched in 2014, the VGS ETF is offered by Vanguard, a colossal global investment management firm with a track record of serving more than 50 million investors worldwide [3].

Vanguard has had a presence in Australia since 1996 and introduced one of its first ETFs, VAS in 2009, establishing an extensive portfolio totaling over A$10 trillion in assets under management (AUM) [3], [4].

Vanguard’s commitment to the Australian market remains evident through its recent introduction of a super fund in October 2022. I have since performed an extensive Vanguard Super Review.

IVV Review

The BlackRock iShares S&P 500 ETF, commonly known as IVV, is a popular choice for investors looking to invest in the U.S. stock market.

IVV closely follows the performance of the S&P 500 Index, which includes 500 of the largest and most influential American companies.

IVV was introduced by BlackRock in 2000, a prominent global investment management firm. As of March 2023, BlackRock manages approximately $9.09 trillion in assets [5].

In 2018, IVV was ‘domiciled’ in Australia, this in effect made it simpler for Australian investors to invest in IVV. By domiciling IVV in Australia, the handling of tax documentation and paperwork has been greatly simplified, resulting in substantial advantages for Australian investors.

Additionally, in December 2022, IVV underwent a 15:1 stock split. This means that for each IVV share held, investors received 15 shares in return.

While this action doesn’t result in any immediate profit or loss, the primary advantage of a stock split is that it allows individual investors to buy more shares of the company at a lower cost.

IVV vs VGS - Table Comparison_1

ETF Management Fees

ETF management fees represent the annual costs associated with managing and promoting an ETF, impacting your overall returns. It’s wise to choose ETFs with lower fees because this ensures that a larger portion of your earnings remains in your pocket.

ETFs are often favored for their cost-effectiveness compared to other investment options. To understand the fee structure, it’s essential to review an ETF’s Product Disclosure Statement (PDS).

In the case of IVV and VGS, they both offer low management fees. VGS, for instance, has a 0.18% management fee. This means that with a $10,000 investment in VGS ETFs, you’d only pay $18 in fees.

IVV, on the other hand, boasts one of the lowest management fees in the Australian ETF market, standing at 0.04%. This means that on a $10,000 investment in IVV, you would only incur $4 in fees.

VGS Dividend History

The current VGS dividend yield (distribution) is 2.14%, which is slightly lower than the index’s dividend yield of 2.33%. This distribution is paid out on a quarterly basis.

IVV Dividend History

The current dividend yield for IVV is 1.68%, slightly lower than the index yield of 1.73%. For the average Australian investor, these yields may appear lower, especially when compared to A200 vs VAS.

This is primarily because American companies do not typically pay dividends at the same rate as many Australian companies do.

VGS vs IVV – 5 Year Annual Performance Comparison

During the COVID-19 pandemic in 2021, IVV delivered an exceptional performance with returns of 37.17%, surpassing VGS, which had returns of 29.67%.

In 2022, market conditions took a downturn due to rising inflation, increased risks of a global recession, and the Ukraine conflict. As VGS is a global index, its losses were more pronounced at -12.37% compared to IVV’s -9.03%.

Interestingly, despite early predictions of a global recession in 2023, YTD performance shows that VGS has outperformed IVV by 2.49%.

ETF Holdings

ETFs comprise a basket of individual stocks that form the core assets of the ETF. The composition of an ETF primarily depends on the index it’s designed to mirror, its investment goals, and, sometimes, specific screening criteria like ESG considerations.

In many cases, certain ETFs will hold larger positions in specific stocks. This applies to both IVV and VGS ETFs. Despite containing hundreds of stocks, a significant portion of their investments is concentrated in a select few.

Conversely, some ETFs follow an equal-weighting strategy, where all the underlying stocks in the ETF are given equal importance. This ensures that, in case one stock outperforms while others lag, a process known as “rebalancing” occurs to maintain equal weight.

An example of such an Australian ETF is Vaneck’s MVW. I delve into this topic in greater detail in my review of MVW vs VAS – What Is The Best Australian ETF? The findings may surprise you.

IVV Holdings

IVV boasts significant allocations to a handful of American firms, with Apple leading the way. Devoting 7.45% of its portfolio to Apple translates to a substantial $74.50 of Apple’s presence in a $1,000 IVV investment.

Given the extensive market capitalization of U.S. tech stocks, it comes as no surprise that they hold a dominant position within the IVV ETF.

Curiously, among the top 10 holdings, only Warren Buffett’s Berkshire Hathaway and UnitedHealth Group diverge from a technology or artificial intelligence focus.

VGS Holdings

IVV vs VGS - VGS Top 10 Holdings

Similar to IVV, VGS also has a significant stake in Apple, albeit to a lesser degree. If you were to invest $1,000 in VGS, you would possess approximately $50.42 worth of Apple shares.

It’s worth noting that Apple carries significant weight within this ETF, continually setting records as the first publicly traded company to achieve a staggering $3 trillion market capitalization.

Both VGS and IVV feature many of the same technology-related stocks. As previously mentioned, U.S. technology firms hold substantial market value, constituting a substantial portion of both these exchange-traded funds.

The key distinction in their portfolios is the inclusion of Exxon Mobil and Warren Buffet’s Berkshire Hathaway shares among IVV’s top 10 holdings, while VGS comprises UnitedHealth Group and JP Morgan Chase & Co as its primary holdings.

IVV vs VGS – Top 10 Holdings As Total Percentage of ETF

IVV vs VGS - Top Holdings as a total of ETF_1

When examining the top 10 holdings and their overall weight within the ETF, it becomes evident that both carry a substantial portion. In the case of the IVV ETF, these 10 shares account for a significant 30.98% of the total ETF.

As mentioned earlier, IVV precisely holds 503 equity holdings, leaving the remaining 493 equities to compose the remaining 69.02%.

Similarly, within the VGS ETF, the top 10 holdings contribute to 20.54% of the ETF’s composition. While this is considerably less than IVV, it’s worth noting that VGS invests in nearly triple the number of shares compared to IVV, with a total of 1,455 shares.

For example, if you distribute the remaining 79.46% of the ETF among the other 1,445 equities, each could theoretically be allocated approximately 0.05%, although this doesn’t occur in practice due to varying weightings for each share.

IVV vs VGS – Market Cap Percentage

IVV vs VGS - Market Cap

When looking at both IVV and VGS portfolios, it becomes evident that they allocate substantial proportions to large-cap and giant corporations.

When we consolidate the market capitalization of these significant and sizable corporations, IVV comprises 82.34%, while VGS encompasses 81.19% within their respective investment portfolios.

Consequently, a substantial chunk of both ETFs is directed towards firmly established corporate giants recognized for their stability.

As a result, it’s highly improbable for either ETF to hold substantial positions in the next Tesla, Apple, or Google-like companies, given that these iconic firms initially emerged as modest enterprises and progressively expanded.

Within the framework of these ETFs, such companies would only represent a marginal portion of the overall investment until they attain a considerable market presence and draw in substantial investments.

For instance, IVV allocates a mere 0.29% to smaller companies, while VGS maintains a similar allocation at 0.16%.

IVV vs VGS – Asset Class Allocation

IVV vs VGS - Asset Allocation

In terms of asset allocation, IVV allocates 96.04% of its portfolio to International equities, while cash makes up the remaining 3.96%.

Similarly, VGS allocates a higher 98.21% of its assets to international equities, with the remaining 1.79% being allocated to cash and listed property.

IVV vs VGS - VGS weighting by Continent_2

Summary – Do You Invest in VGS, IVV or Both?

IVV and VGS have quite similar top 10 holdings, even though they follow different indexes.

IVV, which mirrors the S&P 500, has significant investments in the top 10 U.S. market stocks. These mainly consist of tech-related shares that have shown impressive growth and profits recently.

I believe IVV is a solid investment choice due to its exposure to 500 US equities and its strong long-term track record. Additionally, its exposure to the tech sector, which is not as prominent in the Australian domestic market, adds diversification and growth potential to the investment.

Similarly, VGS also has a comparable top 10 list, although these holdings make up a smaller portion of its overall investments.

This similarity is mainly because VGS has a substantial portion of its ETF invested in the U.S. stock market. As shown in the visual above, about 74.06% of VGS’s ETF is in U.S. stocks.

So, even though VGS follows a global index, a significant part of that index remains highly focused on American companies, primarily due to their large size.

Investing in a global Vanguard ETF like VGS, which includes over 1500 international companies, provides diversification benefits not found in many other ETFs. It’s worth noting that VGS doesn’t cover the Australian domestic market.

For an investor deciding between IVV and VGS, it’s an intriguing choice: do you invest in one or both? Since VGS allocates more than 70% of its assets to the US market, be cautious when considering other international ETFs like IVV in your portfolio.

Holding both IVV and VGS together could accidentally lead to an over-concentration in tech stocks and the overall US market.

Given that both ETFs have substantial US market exposure, this overlap might be excessive in an investor’s portfolio. Nevertheless, both ETFs have shown strong performance and offer competitive fees for what they provide.

  1. ,https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview
  2. https://www.msci.com/documents/10199/c27eeea3-ad05-4944-bef4-fbaef9ef34ec
  3. https://www.vanguard.com.au/corporate/
  4. ,https://www.vanguard.com.au/personal/invest-with-us/etf?portId=8205
  5. https://www.morningstar.com.au/investments/security/NYSE/BLK

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