Last Friday night, the S&P 500 Index (SP: .INX) reached a new all-time high of 6,187 points.
Since the Liberation Day dip, the index has sharply recovered. It is up 24% since 8 April.
Strong performance from US technology stocks has contributed to this performance.
In particular, Nvidia Corp (NASDAQ: NVDA) is up 67% since April. Last week, it reached a new all-time high of $159, giving it a market capitalisation of US$3.85 trillion.
The iShares S&P 500 AUD ETF (ASX: IVV), which tracks the S&P 500 Index, has risen 16% over the same timeframe. Currency movements, given that IVV is unhedged, explain the difference in returns.
Less than three months ago, ASX investors were wondering whether to buy the IVV ETF in the dip.
Today, existing and potential investors contemplate whether it's a buy, hold, or sell, given the recent run of the S&P 500.
Image source: Getty Images
What happened?
Shortly after US President Trump announced his sweeping tariffs in early April, the S&P 500 plummeted.
Since then, investors have become increasingly optimistic that the US is moving quickly to secure trade bills with key trading partners.
Reports that Republican lawmakers are likely to approve Trump's tax bill soon have also improved investor sentiment.
Given these developments, is the IVV ETF a good investment today?
iShares S&P 500 AUD ETF
The IVV ETF is an ASX-listed exchange-traded fund (ETF). As mentioned, it tracks the S&P 500 Index, meaning the 500 largest companies listed in America.
For Australian investors, IVV provides several levels of diversification. The most obvious type is geographical diversification. It also provides exposure to sectors that are underrepresented in Australia, such as the technology sector. Notably, it contains the Magnificent 7 stocks, which are up between 66% and 1,624% over the past five years.
Therefore, in general, the IVV ETF is an excellent addition to any ASX investor's portfolio.
Its historical returns have also been impressive, with the IVV ETF rising 105% over the past 5 years.
However, investing in the IVV ETF today is a different story.
Valuation must be considered. Currently, the price-to-earnings (P/E) ratio of the S&P 500 sits at 25. This is substantially above the historical median, which sits at 18 times.
Accordingly, forward returns are unlikely to be anything like the past 5 years.
New investors should be aware of this, while existing investors may consider reducing their exposure. However, as always, the decision to buy or sell a stock or ETF should be made in the context of an investor's wider portfolio, risk profile, and additional personal considerations.
What could I buy instead?
Investors looking for more attractively valued alternatives have several choices.
Firstly, they could buy individual stocks that are more attractively valued.
Investors should seek out high-quality businesses at reasonable prices. While, on average, the S&P 500 is currently expensive, there are still compelling opportunities to be found.
Within the Magnificent 7, Alphabet Inc (NASDAQ: GOOG)(NASDAQ: GOOGL) is currently the cheapest (with a P/E ratio of 19), while Tesla Inc (NASDAQ: TSLA) is the most expensive (with a P/E ratio of 164).
Secondly, investors who want to stick with US ETFs could pick those filtered based on valuation. For example, the VanEck Morningstar Wide Moat AUD ETF (ASX: MOAT) contains 54 holdings. To be selected, the holdings must be trading at attractive prices relative to Morningstar's estimate of fair value.
The MOAT ETF has risen 65% over the past 5 years, while paying an annual distribution along the way.
A final option for investors is to increase their cash position. While it's rarely a good idea to fully liquidate stocks and hold 100% cash, holding a bit more cash when the market is expensive can be advantageous. This helps to protect downside risk, as well as improving investors' buying power should more attractive opportunities present at a later date.
