The iShares S&P 500 ETF (ASX: IVV) has been a very strong performer over the past year, rising close to 30%. That's much better than the S&P/ASX 200 Index (ASX: XJO), which has only risen by 6%.
As the disclaimer usually says – past performance can't be relied upon for future performance. So I probably wouldn't expect the next 12 months to be as good as that, but can the exchange-traded fund (ETF) keep rising over the longer term?
Businesses can keep growing profit
The performance of an ETF is decided by the underlying investment returns of the holdings.
It's impossible to predict the investment returns of every business within the IVV ETF, particularly in the short term.
However, the market tends to reward businesses that grow their profit over time. When profit compounds, it can grow into a much bigger profit number after three or five years.
A lot of the US share market's returns have been driven by the major players of Nvidia, Microsoft, Apple, Alphabet, Amazon and Meta Platforms. Each of them is growing earnings, with exposure to themes like AI, cloud computing, online video, global digitalisation and e-commerce.
As a whole, the businesses within the IVV ETF could keep growing their underlying value as the US and other developed economies experience population growth, and those companies introduce new products and services.
When we look at the chart below, we can see the effect of historical profit growth on long-term returns, with some regular volatility along the way.
Is the IVV ETF too expensive?
The fund provider Blackrock regularly tells investors what the investor metrics of the ETF are.
At the end of May 2024, the IVV ETF had a price/earnings (P/E) ratio of around 26 and a price-to-book ratio of 4.5 times. These numbers seem historically high, but I don't think it's too useful to compare to other decades because the composition of the S&P 500 has changed.
Technology businesses usually trade on a higher P/E ratio because their operations don't require huge balance sheets, and the market is pricing in stronger-than-average long-term earnings growth.
On top of that, US interest rates are likely to start coming down eventually – even if it's taking longer than expected. Lower rates could help justify a higher price for those companies' earnings.
The one speed bump I can see in FY25 is the uncertainty of the US election. Depending on what happens, there could be a fair bit of volatility. However, the last several decades have shown that the share market can keep performing no matter who is in the White House, so I wouldn't say one person winning necessarily changes anything for the long term.
