IVV: BlackRock's New ETF Bets on Large-Cap Stocks' Dominance

BlackRock, the world's largest asset manager, has launched the iShares Core S&P 500 ETF (IVV) in the U.S., betting that large-cap stocks will continue to dominate the market. IVV tracks the S&P 500 Index, which includes 500 of the largest U.S. companies across various sectors. In this article, we'll explore the reasons behind BlackRock's confidence in large-cap stocks and the potential implications for investors.



BlackRock's Analysis Supports Confidence in Large-Cap Stocks
BlackRock's analysis of market trends and economic indicators supports its confidence in large-cap stocks through several key points:

1. Market Volatility and Fundamentals: BlackRock believes that market volatility is not necessarily indicative of underlying fundamentals. For instance, the summer market volatility was partly rooted in concerns over a slowing economy, but the fundamentals of the stock market and the companies within it remained strong. This is evident in the quick rebound of stocks after the volatility (Source: BlackRock Fundamental Equities).
2. Adaptation to Normal Conditions: Despite the economy struggling to recalibrate post-COVID, the stock market and the companies within it have managed to adapt to more "normal" conditions. This resumption of normalcy also means more volatility, which can be a boon for skilled stock pickers (Source: BlackRock Fundamental Equities).
3. Positive Stock Reaction to Rate Cuts: Generally, stocks have reacted positively to rate cuts. As interest rates moved down over the summer, stocks and bonds both rose, with small cap stocks rallying 10.5% in July (Source: Bloomberg).
4. Technology Stocks' Performance: Technology stocks, which are heavily represented in large-cap indexes, have driven strong returns. The 'Magnificent 7' cohort, which includes Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla, has returned 34% year-to-date as of August 29, 2024 (Source: Morningstar).
5. Bonds as Portfolio Diversifiers: Bonds have provided ballast when stock volatility picked up, further supporting the case for large-cap stocks as a core holding in a diversified portfolio (Source: BlackRock Investment Institute).

IVV's Weighting Methodology and Sector Allocation
IVV uses a market cap weighting methodology, which means that the weight of each stock in the ETF is determined by its market capitalization. This is similar to SPY, which also uses market cap weighting. However, IVV has some structural advantages over SPY. IVV has the ability to lend out shares, which can generate additional revenues, and to reinvest dividends, which can add value if markets generally trend up. SPY, being a UIT (Unit Investment Trust), has some limitations in these areas.

As of August 2024, IVV's sector allocation is quite similar to the S&P 500 Index, with the top five sectors being:

| Sector | IVV Allocation (%) |
| --- | --- |
| Information Technology | 27.5 |
| Health Care | 14.1 |
| Consumer Discretionary | 12.7 |
| Financials | 11.9 |
| Industrials | 10.5 |

IVV's Potential Implications for Diversification and Risk Management
While IVV offers broad-based exposure to the U.S. equity market, its similar sector allocation to SPY and VOO may not provide the same level of diversification as an ETF with a more diverse sector allocation. Investors seeking greater diversification may want to consider ETFs with broader market exposure or different sector weightings.

Furthermore, the concentration of IVV in the Information Technology sector (around 27%) exposes investors to sector-specific risks. If the technology sector underperforms or experiences a downturn, IVV may be more susceptible to losses. To manage this risk, investors could consider allocating a portion of their portfolio to ETFs with different sector exposures, such as the Vanguard FTSE Developed Markets ETF (VEA) or the iShares Core U.S. Aggregate Bond ETF (AGG).

Is IVV ETF A Buy, Sell, Or Hold?
As seen above, IVV's price action (adjusted for dividends) suggests a robust uptrend continuation thesis. Buyers have been able to lift the ETF through a series of higher-lows and higher-highs price structures, corroborating its bullish momentum.

While a near-term pullback is assessed, I have not determined significant downside potential that could scupper the ETF's bullish bias. It's increasingly clear that investors are looking past the macroeconomic and interest rate headwinds that affected the appeal of its dividend yields. While Powell's recent commentary could lower the momentum of chasing the interest rate reduction setup, the trajectory of lower interest rates through 2025 is evident. In addition, IVV's exposure to less expensive and fundamentally strong companies should bolster its appeal to investors wary about the AI upcycle as they look for suitable opportunities to rotate out of cash. Therefore, potential near-term pullbacks in IVV are considered solid opportunities for investors to load up.

Rating: Maintain Buy. Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Consider this article as supplementing your required research. Please always apply independent thinking. Note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.