IVV ETF: Understanding the Limitations of S&P 500 Diversification

The iShares S&P 500 AUD ETF (IVV) may not be as diversified as investors think due to its market capitalization weighting, which gives the largest companies the biggest representation. The top 10 companies make up around 40% of the S&P 500, and the top 5 holdings include Nvidia, Microsoft, Apple, Amazon, and Meta. This concentration has been driven by strong performance in large-cap stocks in recent years, and investors should consider the BetaShares S&P 500 Equal Weight ETF (QUS) for improved diversification.

Investors in the iShares S&P 500 AUD ETF (IVV) may be surprised to learn that the ETF's diversification is not as robust as they might assume. While the ETF tracks the S&P 500 Index, which contains the 500 largest listed companies in the United States, the level of diversification may fall short of expectations due to market capitalization weighting.

The S&P 500 Index is weighted by market capitalization, meaning the largest companies are given the biggest representation. As of June 2025, the top 10 companies make up around 40% of the S&P 500. The top 5 holdings in the IVV ETF include Nvidia Inc (NASDAQ: NVDA), Microsoft Corp (NASDAQ: MSFT), Apple Inc (NASDAQ: AAPL), Amazon Inc (NASDAQ: AMZN), and Meta Platforms (NASDAQ: META), with weights of 7.3%, 7.0%, 5.8%, 3.9%, and 3.0%, respectively [1].

This concentration has been driven by the strong performance of large-cap stocks in recent years. Over the past five years, the S&P 500 has generated an annualized return of 16%, compared to its 30-year average of 10%. The top 10 stocks accounted for more than a third of that gain [1].

Additionally, the high correlation between the top 10 companies, particularly in the technology sector, means that any factors impacting the technology sector will have a material impact on the IVV ETF returns. This correlation is a significant risk for investors, as it exposes them to sector-specific risks rather than benefiting from true diversification.

Investors seeking improved diversification should consider the BetaShares S&P 500 Equal Weight ETF (QUS). Unlike the IVV ETF, the QUS ETF equally weights each holding, providing a more balanced exposure to the S&P 500. This equal weighting can help mitigate the risks associated with sector concentration and market capitalization weighting.

In conclusion, while the iShares S&P 500 AUD ETF (IVV) offers geographical diversification into the US market, investors should be aware of the potential risks associated with its market capitalization weighting. For those seeking improved diversification, the BetaShares S&P 500 Equal Weight ETF (QUS) may be a more suitable choice.

References:
[1] https://www.fool.com.au/2025/07/09/why-sp-500-focused-ivv-etf-isnt-as-diversified-as-you-might-think/