Investing in funds that follow an S&P Index can be a very effective strategy because of how cheap they can be.
There are multiple ASX-listed exchange-traded funds (ETFs) that follow an S&P index.
For example, the iShares Core S&P/ASX 200 ETF (ASX: IOZ) tracks the S&P/ASX 200 Index (ASX: XJO), the Vanguard Australian Shares Index ETF (ASX: VAS) tracks the S&P/ASX 300 Index (ASX: XKO) and the iShares S&P 500 ETF (ASX: IVV) tracks the S&P 500 (INDEXSP: .INX).
It's the iShares S&P 500 (IVV) ETF I want to tell you more about in this article.
The S&P 500 is arguably the world's most famous index because of its long existence, the large companies it covers, and its performance.
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Great US-listed companies
Think about which companies have delivered the biggest changes to how we live and spend money and what has grabbed our attention in the last 20 years. Much of that has been driven by large US-listed companies.
Nvidia is a company enabling huge advances in artificial intelligence (AI). Apple's smartphones have an exceptionally strong market position. Microsoft has significant exposure to AI, cloud computing and gaming. Amazon is a global leader of e-commerce and cloud computing. Alphabet is across numerous areas including internet search, YouTube, internet advertising and its already-operational driverless offering Waymo is intriguing. Meta Platforms grabs our attention through Facebook and Instagram.
All are in the S&P 500 index, and although these companies are listed in the United States, they are growing their presence/earnings in numerous countries, so I consider them global companies.
And tracking the index with 500 holdings across different sectors, I think the IVV ETF offers plenty of diversification.
Strong performance
Past performance shouldn't be relied upon for future performance, but the ASX ETF has done very well, thanks to the strong gains of the underlying businesses.
Over the past five years, the IVV ETF has returned an average of 17.2% per year. With all the big US tech companies a lot bigger than they were five years ago, I'm expecting their earnings growth rate to be a bit slower in the next five years, but I believe their earnings growth could help continue to drive returns for the S&P Index fund.
Affordable ASX ETF
Fees can make a massive difference in how much our wealth grows. Assuming gross returns are the same, a fund with lower fees will produce a stronger long-term net return.
Let's consider the following scenario: someone invested $10,000 in two different funds, and there was a 0.50% fee difference.
If one fund returned an average of 10% per year over the next 30 years, the $10,000 would grow to $175,500.
If another fund returned an average of 9.5% per year in the next three decades, the $10,000 would become $152,200. That's a difference of more than $23,000!
Impressively, the iShares S&P 500 ETF has an annual management fee of just 0.04%. The ASX ETF is one of the cheapest funds on the ASX, which is great for our net returns and wealth-building.
