How I'd unlock more passive income from the iShares S&P 500 ETF (IVV)

Can a fund known for delivering gains deliver good passive income?

| More on:
Woman relaxing at home on a chair with hands behind back and feet in the air.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The iShares S&P 500 ETF (ASX: IVV) is one of the largest exchange-traded funds (ETFs) on the ASX and has built a reputation for delivering capital gains, but not so much for passive income.

How well has it performed? In the five years to December 2024, it has delivered an average return of 17.2% per year. Of course, with returns that good, we shouldn't expect the next five years to be as rewarding – past performance is not necessarily a reliable indicator of future performance.

This fund owns 500 of the largest and most profitable businesses in the US, including many of the world's biggest businesses. That includes names like AlphabetMicrosoftMeta Platform, and Apple – these are some of the main companies that have driven the overall IVV ETF return. Another benefit of this ETF is that it has very low management fees of just 0.04% per annum, so nearly all the returns stay in the hands of investors.

Those businesses at the top of the holdings are not known for providing much passive income because each has a low dividend yield. However, that doesn't mean we can't create the passive income ourselves. Cash flow can be created by the sale of IVV ETF units.

Access a portion of the IVV ETF capital gains

According to Blackrock, the IVV ETF had a 12-month trailing dividend yield at 31 December 2024 of 1.28%. While that's better than nothing, it's not exactly mind-blowing.

How about if we could unlock a much better passive income yield from the fund? Income-hunters may want to have a yield of say 5%, considering that's similar to what term deposits are currently offering.

Aussies could utilise some of the fund's capital gains and sell IVV ETF units annually to create the desired cash flow.

Let's run through an example. Imagine an Aussie had $30,000 invested in IVV ETF units. If the iShares S&P 500 ETF achieved a 10% return, it'd become worth $33,000. Then, the investor could decide to sell 5% of the fund value at the start of the year – $1,500. The income-focused investor would have $1,500 of cash flow and an ending portfolio value of $31,500.

The Australian taxation system (currently) allows investors to benefit from a capital gains discount, reducing how much tax is owed on the sale. I would also suggest turning on the distribution reinvestment plan (DRP) to ensure the fund value grows to its maximum potential.

Of course, the IVV ETF won't achieve a 10% return year after year like clockwork. There will be some good years and some weak ones, perhaps even going through a significant setback as we saw in 2020 and 2022 due to COVID-19 and inflation fears, respectively.

For the sake of simplicity, let's say it returns 10% again. If the iShares S&P 500 ETF rose another 10%, it'd be worth $34,650. If the investor sold 5% of the starting value ($31,500), the passive income cash flow would be $1,575, and the investor would end that year with a portfolio balance of $33,075.

Foolish takeaway

Life doesn't always work out as smoothly as a spreadsheet. But, if the IVV ETF's return was stronger than an average of 5% per year, then it could deliver growth of the payments and capital value.

I'd be cautious about selling more than 5% each year because future performance may not be as good as the past. I think it's wise to keep some of the past growth saved for a rainy day.

With the IVV ETF invested in numerous impressive businesses with global growth aspirations, I think the fund could be one of the most useful options to utilise this strategy that I've summarised today.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Apple, Meta Platforms, Microsoft, and iShares S&P 500 ETF. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Alphabet, Apple, Meta Platforms, Microsoft, and iShares S&P 500 ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on ETFs

Two smiling work colleagues discuss an investment or business plan at their office.
ETFs

2 ASX ETFs I'm thinking about buying next

Now is a great time to consider investing in these two funds, in my view.

Read more »

Five young people sit in a row having fun and interacting with their mobile phones.
ETFs

5 of the best ASX ETFs to buy in February

Check out these funds that could be great picks for Aussie investors this month.

Read more »

Middle age caucasian man smiling confident drinking coffee at home.
ETFs

Buy these ASX ETFs for passive income this month

Here are some top options for income investors to choose from right now.

Read more »

ETF spelt out with a rising green arrow.
ETFs

3 top ASX ETFs to buy and hold for 10 years

Let's see why these funds could be worth holding onto for the long term.

Read more »

ETF in written in different colours with different colour arrows pointing to it.
ETFs

3 top ASX ETFs I'd buy for instant diversification

I believe these funds can offer Aussie investors a lot.

Read more »

A young woman drinking coffee in a cafe smiles as she checks her phone.
ETFs

Worried about Magnificent Seven concentration risk? These ASX ETFs offer varied exposure

The Magnificent Seven makes up about a third of the S&P 500's total market capitalisation.

Read more »

The letters ETF with a man pointing at it.
ETFs

4 excellent ASX ETFs to buy with $4,000 for 2025

Here are a few options for Aussie investors to choose from on the Australian share market.

Read more »

ETF in blue with person's hand in the direction of green and red bars on graph.
ETFs

This will be my next ASX ETF buy

This fund is exactly what my portfolio needed.

Read more »