Under the Spotlight AUS: iShares S&P 500 ETF (IVV)

Warren Buffett offered sage advice at Berkshire Hathaway’s 2021 meeting: ‘In my view, for most people, the best thing to do is own the S&P 500 index fund.’ 

Stake’s customers have channelled their inner Oracle of Omaha and made BlackRock’s ASX-listed iShares S&P 500 ETF ($IVV) the second most bought security on our platform so far in 2025. It’s easy to understand:  as the high-octane rally in big tech stocks sees the S&P 500 Index outpace other global markets, U.S. stocks have been the asset class to own. The ASX-listed $IVV (there’s a U.S.-listed version with the same ticker) is up 31% over the past year, compared to a 11% gain in the S&P/ASX 200 Index. 

Tracking the S&P 500 Index since 2000, $IVV offers one-click exposure to a diversified portfolio of world-leading companies, for a management fee of 0.04%. $IVV delivered an annualised total return of 16.05% in the ten years to December 2024. 

Tech on top

Big tech dominates $IVV’s top 10 stocks, with Apple ($AAPL), Microsoft ($MSFT) and Nvidia ($NVDA) ranked as the three biggest companies in the portfolio. A 30% allocation in tech has allowed $IVV investors to ride the AI and broader tech boom in recent years. However, this week’s volatile trading in Nvidia and other AI stocks highlights the potential risks from a large weighting in tech. 

China’s DeepSeek rocked the AI world this week with its low-cost AI model, casting doubt over the extent of U.S. leadership in AI. This added fuel to the debate about likely returns from the heavy spend on AI. Oracle ($ORCL), SoftBank ($SFTBY) and OpenAI have created Stargate, a project committed to spend US$100b – and potentially up to US$500b – on AI infrastructure. Meta Platforms ($META) will invest US$60b-US$65b on AI this year, while Microsoft said it will put up US$80b in FY25. While Morgan Stanley cut its price target for Nvidia from US$166 to US$152 after DeepSeek unveiled its latest model, the investment bank said it would not likely lead to major changes to AI spending plans among U.S. big tech companies.  

The rapid pace of Chinese AI needs to be closely watched, but U.S. tech stocks remain the main driver of earnings growth in the S&P 500 Index. This reflects the strength of product innovation, scale and network economics. From chips, smartphones, social media, search and cloud platforms, the big tech companies are at the centre of the global economy. The Magnificent 7 are expected to deliver year-on-year (YoY) earnings growth of 21.7% in Q4, according to FactSet. The momentum is expected to remain, with earnings growth of more than 17% over the next four quarters. Across the broader tech sector, that figure is running at a YoY pace of 14%. Strong cash flows are funding big capex plans, dividends and buybacks.

Concentration risk is often cited as a risk for the S&P 500, given the small number of tech companies that account for a third of the index. While concentration is at its highest levels for decades, the operations of these giant companies are diverse. For example, Amazon is exposed to online retail, its AWS hyperscale cloud platform and advertising. Meanwhile, Microsoft has its suite of business productivity tools, its Azure cloud platform and gaming. Still, Goldman Sachs ($GS) argues that high concentration can lead to lower returns over the long term.  

But more than tech 

While $IVV offers access to U.S. tech stocks, it also offers exposure to some of the most storied names in corporate America. This offers diversification if the tech sector gets the wobbles. The benefit of diversification was highlighted on Monday when the S&P 500 Index fell 1.46% against a 3.07% slide in the more tech-heavy Nasdaq Composite.

Financials are the second biggest weighting in $IVV. Warren Buffett’s Berkshire Hathaway ($BRK.B) and JPMorgan Chase ($JPM), the world’s largest listed bank, feature prominently. Last week we looked at the rally in U.S. banks stocks built on strong earnings and hopes for lighter regulations, when we analysed State Street’s Financial Select Sector SPDR Fund ($XLF).

It’s not only tech stocks that have enjoyed strong gains. Retail behemoth Walmart ($WMT), a top 20 holding, is up 77% over the past year thanks to heavy investment in its online business, acquisitions and buybacks. Streaming giant Netflix ($NFLX) is trading at a record high after pushing past 300m subscribers in Q4 and forecasting 11% YoY revenue growth in Q1 FY25. 

Magnificent 7 earnings steal the headlines, but the remaining S&P 500 companies are expected to produce solid earnings growth. The blended earnings growth rate – which combines actual and forecast earnings – for the remaining 493 companies in the S&P 500 is 9.7% for Q4 2024, according to FactSet. For those companies, this would be the highest earnings growth rate since Q2 2022.

Premium valuation

The 22% rally in the S&P 500 Index over the past year has left valuations looking elevated. The  12-month forward P/E multiple for the S&P 500 is 22.2x. This is above the five-year average of 19.7 times and above the ten-year average of 18.2x. Analysts predicted an average 10% gain for the S&P 500 Index at the start of 2025.  

Valuations above historic norms leaves little room for disappointments this earnings season. Expectations for profit margins are high. The blended net profit margin for the S&P 500 for Q4 2024 is 12.1%, according to FactSet. This is below the previous quarter’s net profit margin, but above the five-year average of 11.6%. This would be the third consecutive quarter that the S&P 500 reports a net profit margin above 12%.

Buffett Rules

$IVV offers an easy, low-cost way to take Buffett’s advice on stock picking. Instead of doing 30 or 40 trades a day, investors can buy one ETF and have exposure to a portfolio of global companies that have generated capital gains and dividends over the long term. 

That doesn’t mean there won’t be pullbacks. This week’s tech stock sell-off is a timely reminder of the bouts of volatility on the road to long-term wealth. Remember the market maxim: it’s not timing the market, but time in the market that counts. It worked for Buffett.    

This is not financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.