A deep dive into the iShares Core S&P/ASX 200 ETF

We know from history that after every downturn the market eventually hits new highs and, with inflation falling and interest rates likely to be cut later in the year, it appears that optimism has now re-entered the market.  

The S&P/ASX 200 was up more than 13% in the three months to the end of January, so investors who stayed the course have been well rewarded, with the possibility of more gains to come. 

For investors who want to buy into the S&P/ASX 200, one of the best ways to do so is via an ETF that tracks this index. One such ETF is the iShares Core S&P/ASX 200 ETF (ASX: IOZ), which is a core ETF in InvestSMART’s diversified ETF portfolios. 

About the iShares Core S&P/ASX 200 ETF (ASX: IOZ) 

The iShares Core S&P/ASX 200 ETF (ASX: IOZ) is diversified across the 200 largest companies in Australia weighted by market capitalisation.  

It is managed by BlackRock, which is the largest asset manager in the world. A big advantage of an investment manager such as BlackRock is that it not only provides world class portfolio management, but its size enables economies of scale which can lead to ultra-low fees. 

Here are a few quick facts about IOZ: 

• Investment Manager: BlackRock 
• Inception Date: 6 December 2010 
• Size: $5.12bn 
• Management Fee: 0.05% 
• Benchmark Index: S&P/ASX 200 Index
• Distribution Frequency: Quarterly 
• Rebalance Frequency: Quarterly 

What is IOZ’s management fee? 

IOZ has a management fee of just 0.05%, which is a similar fee size to other ETFs that track the top 200 companies in Australia. For example, State Street’s SPDR S&P/ASX 200 Fund (ASX: STW) also has a fee of 0.05%, and Betashares Australia 200 ETF (ASX: A200) has a slightly lower fee of 0.04%. 

There are two things to keep in mind about these fees. Firstly, the fee difference of 0.01% between IOZ and A200 is not significant and is equivalent to just a cup of coffee a year for every $50,000 invested. Secondly, there is always the chance that BlackRock (or State Street) will drop their fees even further at some point in the future. 

Where is IOZ invested? 

The ETF’s top 10 holdings are listed in the table below. 

Source: BlackRock. Holdings as of 31 January 2024. 

From a sector perspective, as of 31 January 2024, IOZ’s holdings include Financials 29.35%, Materials 23.74%, Health Care 9.88%, Consumer Discretionary 6.86% and Industrials 6.70%. 

How has IOZ performed? 

As IOZ is weighted by market capitalisation, its performance and income distributions are heavily influenced by Australia’s biggest companies. 

The good news is that these companies are generally good dividend payers, and hence IOZ pays out a healthy distribution stream, as you can see in the table below. 

Source: BlackRock. Returns (after management fees and costs) for the period ending 31 January 2024. *Inception date is 6 December 2010. 

The reason why ETFs such as IOZ provide distributions rather than dividends, is due to their structure. Across the portfolio of stocks within the ETF, there are often different ways that income is distributed back to the ETF. For example, some stocks may pay fully franked, partially franked, or unfranked dividends, whilst other stocks may pay distributions or provide capital returns. 

In addition, the rebalancing within the ETF itself may also involve the buying and selling of shares, which could result in capital gains or losses. 

The ETF collates all of this income with accompanying credits, and any capital gains or losses, and distributes it back to the investor, who will then use that information at tax time. 

Diversification benefits 

One of the benefits of a widely diversified ETF such as IOZ, is that when one company in that ETF is booming, the investor will have exposure to it. Hence the investor can participate in the stock’s gains, without having to take a huge bet on that company individually. 

A recent example of this is Neuren Pharmaceuticals (ASX: NEU) which was added to the S&P/ASX 200 in September 2023. Since that time, the company has reported positive results from its drug trials, which has resulted in its share price doubling. 

Diversification also provides investors with downside protection, in that if a company in their portfolio underperforms, the downside is minimised. 

One diversification challenge with the Australian market is that there is a high exposure to the Financials and Materials sectors (which together make up around 53% of the S&P/ASX 200). Hence, if there is a significant downturn in one of these sectors it will impact the overall market. 

This is why it’s also good idea to diversify across other asset classes, such as international shares and bonds. 

Key takeouts 

There is much to like about IOZ, including its size, diversification levels, ultra-low fee, and excellent performance since inception.  

The fund is also managed by BlackRock, the biggest asset manager in the world. 

IOZ will closely follow its benchmark, the S&P/ASX 200 Index, and is an excellent Australian shares ETF for long-term investors. 

These advantages are amongst the reasons why InvestSMART likes IOZ and has included it as a core ETF in its Diversified ETF portfolios.