IShares Core S&P 500 ETF is well-diversified and offers cheap exposure to 500 of the largest U.S. companies.
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Key Morningstar Metrics for IShares Core S&P 500 ETF
- Morningstar Medalist Rating: Gold
- Process Pillar: High
- People Pillar: Above Average
- Parent Pillar: Above Average
IShares Core S&P 500 ETF IVV offers a well-diversified, market-cap-weighted portfolio of 500 of the largest US stocks. It accurately represents the large-cap opportunity set while charging a rock-bottom fee, a recipe for success over the long run.
The exchange-traded fund tracks the flagship S&P 500, which selects 500 of the largest US stocks—roughly 80% of the US equity market—and weights them by market cap. An index committee has discretion over selecting companies that meet certain liquidity and profitability standards. While a committee-based approach may lack clarity, it adds flexibility to reduce unnecessary changes during reconstitution, taming transaction costs compared with more-rigid rules-based indexes.
The end portfolio is well-diversified and accurately resembles the US large-cap opportunity set. This allows the ETF to capitalize on its low fee, ultimately delivering sound long-term performance on both an absolute and risk-adjusted basis.
The bedrock of this ETF is market-cap weighting, which harnesses the market’s collective wisdom of the relative value of each holding with the added benefit of low turnover and associated trading costs. It’s a sensible approach because the market tends to do a good job pricing large-cap stocks. The companies in this portfolio attract liquidity and widespread investor attention, such that prices reflect new information quickly.
However, when few richly valued companies or sectors power most of the market gains, market-cap weighting may expose the ETF to stock- or sector-level concentration risk. As of December 2023, the top 10 holdings made up the largest portion of the index (31%) in several decades and the 30% allocation to technology stocks was the highest since the dot-com bubble. But this is not a fault in design: The S&P 500 simply reflects the market composition. In the long run, its broad diversification, low turnover, and a low fee outweigh these risks.
iShares Core S&P 500 ETF: Performance Highlights
This ETF accurately represents the US large-cap opportunity set, allowing it to leverage its cost advantage and drive sound category-relative performance. These qualities position the ETF for outperformance against US large-cap peers over the long run.
The ETF’s performance closely follows the ups and downs of the US stock market, since it is always invested. All else equal, this ETF should outperform its peers that hold cash during market rallies. Likewise, the ETF should lag similar peers when the market falls because it lacks the cash buffer sported by its peers.
The ETF misses out when small-cap stocks outperform large-cap stocks, as they did in the fourth quarter of 2020, because it focuses on the largest and the most established companies. The S&P 500 lagged the Morningstar US Market Index (which includes large-, mid-, and small-cap stocks) by 2 percentage points over the fourth quarter of 2020. Likewise, the ETF can become top-heavy during periods of consolidation among top US companies. This exposes the portfolio to US market risks should another dot-com-type bubble burst, during which the S&P 500 fell over 40% in the early 2000s.
The author or authors do not own shares in any securities mentioned in this article.Find out about Morningstar’s editorial policies.
