The best ETF for US exposure: VTS vs IVV
Tap into the growth of the US market through ETFs.
Exchange traded funds (“ETFs”) continue to rise in popularity with over half of Australian investors now holding at least one ETF in their portfolio. January 2025 was the best month for ETF inflow, amassing a record $4.6 billion into the market.
Why ETFs?
ETFs offer instant diversification with many investors using them to access passive investments. Active managers typically struggle to outperform an index over longer periods, creating a lure for passive ETF investing.
Passive investors have benefited from a strong run. Notably, the US equity market returned eyewatering numbers last year with the S&P 500 gaining 25%, thanks to ‘Magnificent 7’ dominance. Unsurprisingly, iShares S&P 500 ETF (ASX: IVV) had the second highest 1-year net flows in 2024 indicating an increasing investor appetite for passive US equity exposure.
The US market attracts a flock of investors due to its size and liquidity as the biggest listed equity exchange in the world. Further, US companies tend to be global leaders whilst the Australian market has a domestic focus. There are many reasons for the appeal of the US market, Shani Jayamanne sat down with leading financial commentator Danielle Ecuyer, to discuss why US equities can’t be ignored in a portfolio.
Two popular ETFs used for US exposure are iShares S&P 500 ETF (ASX: IVV) and Vanguard US Total Market Shares ETF (ASX: VTS). The two are almost indistinguishable with the Morningstar Correlation Matrix indicating a 0.99 correlation. This article will provide a breakdown of the key differences, and which one may be right for you.
iShares S&P 500 ETF (IVV) vs Vanguard US Total Market Shares ETF (VTS)
Purpose
Both IVV and VTS track an index meaning they are passively managed. IVV tracks the flagship S&P 500, which selects 500 of the largest US stocks, comprising ~80% of the US equity market and weights constituents by market cap. On the other hand, VTS tracks the CRSP US Total Market Index (~3,600 constituents), which represents the entire investable US stock market and also weighs constituents by market cap.
Morningstar rating
The Morningstar medallist rating is a forward-looking system that aims to predict funds’ performance versus a relevant benchmark index or peer group.
The top three ratings of Gold, Silver, and Bronze all indicate that our analysts expect the rated investment vehicle to beat the Morningstar Category index or category median over the long term. It takes the form of Gold, Silver, Bronze, Neutral, and Negative, with higher ratings denoting our conviction in a fund’s ability to outperform and lower ratings indicating a lack of conviction.
IVV and VTS are both currently Gold rated meaning that analysts consider them strong across the three key evaluation pillars – process, people, parent.
Diversification
The key area where the two ETFs differ is diversification. As discussed, IVV tracks the S&P 500 which comprises large-cap companies with the minimum index entry requirement of USD $20.5 billion. Alternatively, VTS tracks the CRSP US Total Market Index which has a wider universe of companies that accommodates for mid, small and micro caps.
The charts below illustrate a market capitalisation breakdown for both ETFs. IVV clearly skews to the larger companies with 81.5% of holdings at giant and large cap status. VTS skews similarly, however only 71.7% of its holdings are in that same status due to a bigger emphasis on the mid, small and micro-cap, reflecting the entire investable market.
With historical evidence pointing to small cap outperformance over time, a heavier presence in small caps may underpin greater returns. Although as indicated by the similar 10-year returns for both, it is not clear that a broader approach has made a reasonable difference to returns.
When making an asset allocation decision, you must consider how potential new holdings may influence your overall portfolio allocation. For example, investors with existing US small cap holdings may find that VTS increases their exposure to small caps past comfort levels.
Whilst the top 10 constituents of both ETFs remain the same, VTS naturally results in lower weighting for the larger constituents. IVV skews to the larger players with its top 10 holdings comprise 37% of ETF portfolio weight in comparison to VTS’s 32%. Big tech companies dominate both ETFs introducing the argument for some concentration risk in both.
Fees
Morningstar research shows that lower-cost funds have a greater chance of outperforming their more expensive peers. The chart below shows the cheapest quintile achieving a higher success ratio than the most expensive fee quintile. Despite this, investors should not look at fees in isolation as qualitative factors are also vital in determining a fund’s outperformance potential.
The total cost of an ETF comprises of holding costs and transaction costs. The latter is often determined by your broker whilst the holding costs are linked to owning shares in an ETF.
Morningstar’s total cost ratio (“TCR”) aims to identify the main component of the total cost of a listed fund. The TCR is typically a percentage of the holding value. The TCR includes management or investment fees, performance fees, administration fees and any other fees for underlying funds or similarly outsourced fee arrangements. An investment with a TCR of 0.5% and a holding value of $5,000 would incur $25 in fees per year.
VTS tops IVV in this category with a TCR of 0.03% compared to IVV’s 0.04%. Whilst this may not appear like a significant difference, the TCR becomes a larger consideration (than transaction costs) when the ETF is held over a long-time horizon. VTS has the benefit as a total-market fund. These funds mitigate transaction costs as they don't target specific segments of the market and aren't forced to buy or sell stocks when they enter or exit. Additionally, by pure management fee, VTS is currently the cheapest US-Equity ETF on the ASX. However, the turnover in a broad index-based ETF like IVV is very low.
Naturally, index ETFs will see minor deviations from their benchmark returns that are approximately equal to their annual fees, this is referred to as a tracking difference. On the other hand, wider return lags can be attributed to tracking errors. This is measured by the standard deviation of the variation between an ETF’s return and its benchmark’s return over time. VTS also emerges victorious in this category with a 3-year tracking error of 5.52% compared to 7.21% for IVV.
Read here to find out more about the total cost of owning an ETF.
Performance and volatility
In terms of returns, the performance is similar with IVV generating marginally better returns over every period as illustrated.
If you had invested $10,000 into VTS ten years ago the investment would now be worth $43,894. Comparatively, that same investment in IVV ten years ago would be worth $45,185 – a difference of $1,291.
This returns difference can be attributed to the difference in weighting for large and small caps in the ETFs. Despite historical evidence of small cap outperformance, the opposite of this has occurred in the US market over the last 10 years. As illustrated below, small cap stocks have consistently lagged their larger counterpart and the market overall.
Investors deciding between IVV and VTS may question the need for diversification into small caps due to lower recent performance and the associated volatility. However, Morningstar sees small caps as well positioned to add significant value to investors’ portfolios in 2025 and beyond. Falling central bank rates, attractive valuations and a boost from reshoring pave the way for potentially rewarding returns for investors willing to embrace the risk.
The current concentration of the US market has the top 10 companies accounting for 37% of the S&P 500 with 30% of that being in the technology sector. Historically following periods of heightened market concentration, small caps generally outperform.
Given the presence of smaller cap stocks, especially in VTS, volatility should be taken into consideration. The large cap-heavy fund IVV derived a 3-year standard deviation (volatility measure) of 12.8% compared to VTS’ 13.1%. The inclusion of smaller companies into a fund increases overall volatility, although just slightly in this case. This may be a consideration for investors with shorter time horizons. This slight variation is a result of mid and small caps having minimal impact at less than 10% of the overall portfolio.
Turnover
The turnover of a fund is the frequency at which assets within are bought or sold. A turnover ratio represents the percentage of a fund’s holdings that have changed over the past year. A higher turnover ratio is often indicative of a higher churn in the portfolio as compared to a long-term buy and hold manager who typically runs the portfolio with a lower turnover ratio. High churn within an ETF can result in higher transaction costs or capital gain taxes as securities are bought and sold.
Described as a one stop shop for all US stocks, VTS being a total-market fund mitigates turnover and associated transaction costs. The ETF currently sports a turnover ratio of 4% with a small amount of turnover at the lower rungs of the portfolio. However, the index implements buffer rules around its lower market-cap bound to limit unnecessary churn (market cap of at least USD 15 million and at least 12.5% of total shares publicly available). It also spreads the rebalancing process over a five-day period to reduce potential market impact costs.
Best-in-class for large cap investors, IVV also has the benefit of low turnover at a reported 0%. This is perhaps reflective of the large cap opportunity set. The index committee further curbs turnover by implementing changes as it sees fit rather than adhering to a strict reconstitution schedule.
Listing
A notable downside to VTS is that it is a cross-listed fund, meaning it trades on multiple markets simultaneously. For investors this may require added tax and administrative upkeep requirements. On the other hand, IVV switched from a cross-listed to a domestic fund in 2018 which negates the additional paperwork requirements for investors. For further information, you can read tax implications when investing in overseas shares and ETFs.
Which ETF is the best for your portfolio?
If you are deciding between the two it is important to align your choice with your investment strategy and goals. Whilst both ETFs offer similar returns and broad US exposure, minor differences in diversification, fees and volatility may guide your choice.
There is a negligible 0.01% variation in TCR for each fund and in isolation are some of the lowest cost EFTs available in the Australian market. If you invested $10,000 in each at an 8% return before fees for 10 years, the future value of VTS would be ~$20 more than IVV.
VTS has marginally greater volatility (std. 13.41) due to exposure to small and micro caps unlike its competitor IVV (std. 13.18) who owns less than 1% of holdings in these categories category. Generally, volatility is not a significant consideration for longer term investors, especially at these low points of difference. If you anticipate a withdrawal in a shorter time span, then taking heed of volatility can help avoid losses.
For further information on ETF investing, you can find some of our best ETF resources here.
