Both the iShares S&P 500 ETF (ASX: IVV) and the Vanguard MSCI Index International Shares ETF (ASX: VGS) find themselves on the ASX's most popular exchange-traded funds (ETFs) list.
The two funds are popular with investors who want to diversify their ASX share portfolios away from the Australian stock market.
The ASX is a wonderful place to invest and is home to many companies that have historically delivered healthy returns and meaningful dividend income. Those include famous blue chips like Commonwealth Bank of Australia (ASX: CBA), CSL Ltd (ASX: CSL), Woolworths Group Ltd (ASX: WOW) and BHP Group Ltd (ASX: BHP).
However, the ASX lacks direct access to most of the world's largest and most influential companies. The appeal of investing in the likes of Apple, Microsoft, Netflix, Mastercard, Amazon and Berkshire Hathaway is something that many ASX investors understandably can't resist.
That's where the iShares S&P 500 ETF and the Vanguard International Shares ETF can step in.
Both of these ASX ETFs provide access to the world's largest and most dominant companies. However, there are still significant differences between these two index funds. Today, let's dive into the advantages and disadvantages of both.
VGS vs. IVV: What's the difference?
These two ETFs are similar in their makeup yet rather different in their overarching scope.
Let's start with the IVV ETF. The iShares S&P 500 ETF is a simple index fund that tracks the American S&P 500 Index (SP: .INX). This flagship index of the American markets covers the largest 500 stocks listed on both the New York Stock Exchange and the Nasdaq. That includes everything from Apple, Microsoft and Amazon to General Motors, Coca-Cola and Nike.
At its core, this ASX ETF represents a 'slice of America', as Warren Buffett might put it.
In contrast, the Vanguard International Shares ETF is, well, more internationally focused. On paper, it gives investors exposure to more than 20 different advanced economies' stock markets. Those range from Japan, the United Kingdom, Israel and Canada, to Germany, Sweden, New Zealand and Singapore.
So this is merely a choice between a US-focused index and an index covering a huge range of global companies, right? Well, not exactly.
VGS is far less diversified than it may first appear. Although it does technically track this huge geographical range, this ASX ETF is still weighted by market capitalisation, meaning the largest companies take up the most real estate in its portfolio.
That results in VGS being hugely overweight to, you guessed it, the American markets. US stocks account for a huge 73.3% of this index fund's portfolio. Its top echelons are dominated by those same companies that you'll find at the top of the iShares S&P 500 ETF.
Splitting hairs with these two ASX ETFs
To illustrate, as of 31 October, the top 10 shares of VGS' portfolio account for 25.3% of its entire weighting. Those top ten shares all happen to be American and are almost identical to IVV's top ten stocks, which, in turn, make up 34.8% of its portfolio.
As such, we can conclude that both of these popular ASX ETFs overlap significantly.
VGS still does offer some inherent diversification. 16.7% of its portfolio currently consists of European shares, with another 6.7% hailing from the Asia Pacific.
So if you find that diversification attractive, you might wish to stump up for VGS' slightly more expensive management fee of 0.18% per annum, as opposed to IVV's 0.04% per annum.
But aside from this, these two ASX ETFs are far more similar than they might first appear. Picking one over the other will largely depend on each potential investor's individual preferences and goals.
