Choosing a US market ETF: IVV or VTS
Each of these ETFs provide exposure to a range of leading American companies, but there are a few differences investors should consider when weighing up the Vanguard US Total Market Shares Index and iShares S&P 500.
iShares S&P 500 ETF (IVV) and Vanguard US Total Market Shares Index ETF (VTS) are almost indistinguishable. They're both cheap and track the broad US stock market.
So, which should you choose?
We asked Morningstar associate director, manager research and ETF expert Alexander Prineas for his thoughts.
Ultimately, Prineas says investors can't go wrong with either of these ETFs.
The choice between IVV or VTS boils down to which features the investor values most. And the debate needn’t be an either/or question. You can consider both.
Morningstar rating: tie
Both IVV and VTS carry a Gold Morningstar analyst rating. This means analysts consider them to be best-of-breed funds that shine across the five evaluative pillars – process, performance, people, parent and price.
In awarding IVV a Gold rating, Prineas said: "All up, IVV ticks the boxes– namely, an incredibly low fee, liquidity, a track record of effective implementation, and a diversified portfolio." Similar comments applied to VTS.
Prineas notes that active managers have typically struggled to outperform the S&P 500 over sustained periods, with most falling short after fees, making these ETFs more attractive.
"One possible explanation lies in the market’s efficiency, attributable to the sheer number of investors, researchers, and commentators following, analysing, and trading US equities," he says.
"The difficulty faced by active fund managers in beating the index raises the attractiveness of an efficient and low-cost passive vehicle."
For Australian investors, Prineas says dominance and diversity of American companies means that by buying one of these ETFs investors gain exposure to a broad portfolio of some of the world’s best companies, including in sectors that are underrepresented on the ASX, such as technology and healthcare.
Price: tie
Both Vanguard and iShares charge incredibly low fees of 0.04 per cent for their US broad market ETFs. Not only is this significantly below any active fund, but it makes them the cheapest ETFs in the Australian market.
Diversification: VTS has the edge
This is one key area where the two ETFs differ. IVV tracks the S&P 500, a free-float, market-cap-weighted benchmark that is composed of the largest 500 US companies and represents about 80 per cent of the market cap of all US equities.
It sticks mainly to large-cap securities, with some exposure to mid-caps. IVV aims to fully replicate this index. The minimum market cap for companies in the index is about US$5 billion. Information technology, financials, and healthcare formed more than half of the S&P 500 as at November 2018.
Alternatively, VTS tracks the CRSP US Total Market Index, which is extremely diversified, extending to mid- and small-cap companies. This index comprises more than 3500 stocks.
Vanguard uses optimised sampling rather than full replication to duplicate the benchmark. This reduces transaction costs and portfolio turnover, a smart move for less-liquid small-cap names, Prineas says.
Like any passive strategy, IVV and VTS offer no chance of protection if US equities dip. However, Prineas says IVV should outperform when small caps struggle, which often occurs in down markets. For both ETFs, he says sticking it out for the long term improves your odds of a good result.
Listing: IVV has slight advantage
Prineas says a minor drawback for VTS is its cross-listing. It is domiciled in both Australia and international markets, which can create paperwork and estate complications. But this is part of how VTS achieves its scale and low cost, he says. VTS is a cross-listing of Vanguard's US-listed Vanguard Total Stock Market ETF VTI, which it has managed since 2001.
IVV switched from a cross-listing to a dedicated local Australian exchange-traded fund in September 2018, which simplifies taxes and paperwork for investors.
Bid-ask spreads: slight advantage to IVV
IVV's incredibly low price and tight bid-ask spreads are largely achieved by the ETFs size, and its avoidance of less liquid small-caps, Prineas says.
Despite Vanguard's scale, the bid-ask spread has not been quite as low as much larger IVV. Still, the spread has been about or below 0.10 per cent since 2015, barely a blip for long-term investors.