If I told you there was an inherently diversified investment out there, passive in nature but bringing in an average of 21.1% per annum over the past three years and endorsed by Warren Buffett himself, would you believe me? You should, because those statements are all true when it comes to the iShares S&P 500 ETF (ASX: IVV).
This index fund is indeed inherently diversified, offering exposure to the largest 500 companies listed on the American stock markets. Being a market capitalisation-weighted index fund also means that investors never have to worry about managing its portfolio. They can simply buy it and put it in the bottom drawer, making it truly passive.
It's also true that this exchange-traded fund (ETF) has returned 21.1% per annum over the past three years, as of 31 August anyway. That's a return that rivals that of Warren Buffett at Berkshire Hathaway (albeit over a far longer time span).
Speaking of Buffett, the legendary investor has indeed recommended an investment in this index fund for most investors. In fact, he has decreed that most of his estate is to be invested in an S&P 500 Index fund after he shuffles off this mortal coil.
So all this begs the question: Is buying the iShares S&P 500 ETF today the smartest investment you can make?
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Is this Buffett-endorsed S&P 500 ETF the smartest investment on the ASX today?
Well, I do think that investing in the S&P 500 is indeed a smart investment. I'm not so bold as to call it 'the smartest', but I think it would suit any long-term investor well. The American markets, despite some recent ructions, remain the engine room of the global economy. Its largest stocks, whether they be Amazon, Meta Platforms, Alphabet, Microsoft, or Coca-Cola, sell goods and services that dominate our daily lives, and the lives of most people on the planet.
As Buffett himself has said, it's never a good idea to bet against America. And this index fund represents America.
Saying that, there is a big caveat for investors to keep in mind.
Firstly, the recent performance of the iShares S&P 500 should not be taken for granted. It is not normal for this index to deliver annual returns of 20%. Its long-term average sits at something closer to 8%. As such, don't buy this ETF thinking it will double your money every five years. I would be shocked if investors continued to enjoy that kind of return. I would be less shocked if we saw the gains of recent years pared back significantly over the next few years.
So make sure you lend some perspective to those returns. But even so, if you have a long investing horizon, it remains my view that buying this ASX index fund would be a very smart investment indeed.
