iShares Core S&P 500 ETF USD Acc GBP (LSE:CSP1) - ETF price


ETF Report

iShares Core S&P 500 UCITS ETF USD (Acc) (GBP) CSP1

AnalystReport

PortfolioConstruction

The S&P 500 is a float-adjusted, market-cap-weighted portfolio of 500 large US-domiciled stocks. For a constituent to be included, it must meet the following eligibility criteria: an unadjusted market cap of USD 6.1 billion or greater, a free-float rate of at least 50% of its shares outstanding, and a positive sum of the most recent as-reported earnings for four consecutive quarters, as well as for the most recent quarter. The US Index Committee maintains the S&P 500 and meets on a monthly basis. It aims to minimise index membership turnover. If a constituent no longer meets the entrance requirements, the committee will not remove the member immediately if it deems the change temporary. The index rebalances quarterly in March, June, September, and December. The index is well-diversified by sector and security. The most significant sector exposure is to information technology (20%-25%), followed by financials, healthcare, consumer discretionary, and communication services (each at 10%-15%). The top 10 holdings constitute approximately 20% of the total index value and include world-leading companies like Apple (3%-4%) and Microsoft, Amazon, and Berkshire Hathaway (2%-3% each).

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Fees

The fund has an ongoing charge of 0.07%, making it one of the cheapest S&P 500 ETFs domiciled in Europe. The fund has outperformed its benchmark, with tracking difference (fund return minus index return) during the past three years of 0.29% for the period ended January 2019. This is mainly because of differences in withholding-tax treatment between the fund and the index (by virtue of being domiciled in Ireland and the double treaty between Ireland and the United States, the fund enjoys a better withholding tax rate on dividends than the S&P 500 Net Total Return Index). Securities-lending revenues have also contributed to partially offset fees. The fund's annualised tracking error during the past three years has been tight, at or below 0.04%. Other costs carried by the unitholder include trading costs when buy and sell orders are placed for ETF shares, including bid-ask spreads and brokerage fees.

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FundConstruction

This fund uses full physical replication to capture the performance of the S&P 500 Net Total Return Index. The fund owns--to the extent that is possible and efficient--all the underlying constituents in the same proportion as its benchmark. It also uses futures to mitigate tracking-error risk. The fund engages in securities lending to enhance performance, lending up to 100% of its net asset value. Parent company and lending agent BlackRock covers the operational cost involved in securities lending for a 37.5% of the revenue generated from this activity, while the fund receives 62.5%. Securities lending exposes the fund to counterparty risk, or the possibility that the borrower will not return the securities it borrowed. To manage this risk, BlackRock takes collateral greater than the total loan value. Collateral levels vary between 102.5% and 112%. Acceptable collateral includes equities, government bonds, and in some cases cash. In the 12 months to the end of January 2019, the fund lent out average 4.39% of its assets under management with a maximum on loan of 5.3% and collateralisation level of 110.3% of loan. The net lending return was 0.01%. BlackRock also provides indemnification for its iShares ETFs, that is, if a borrower defaults and fails to return borrowed securities, BlackRock will replace them. The indemnification agreement is subject to changes without notice. IShares holds a dominant position in the European ETF marketplace by virtue of its comprehensive offering. We value iShares' strong fund management systems and processes, highly experienced team, and extensive internal network supporting the portfolio managers. That said, we think that the vast economies of scale generated by the BlackRock group could be better shared with investors in the form of lower ongoing charges.

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Suitability

IShares Core S&P 500 ETF is one of the best options in its Morningstar Category. This exchange-traded fund offers investors diversified exposure to U.S. large-cap stocks by tracking the S&P 500, the most-cited proxy for the U.S. equity market. Taking a passive approach to this market makes a lot of sense given the solid body of evidence showing that active managers struggle to consistently outperform a standard U.S. large-cap equity market benchmark.

The ETF's risk-adjusted returns have ranked in the first quartile of its category, which includes both active and passive funds, during the trailing three- and five-year periods.

With a low ongoing charge of 0.07%--one of the lowest among all S&P 500 funds and ETFs--and a soundly constructed and reasonably representative benchmark, this fund is well-positioned to continue its long streak of producing superior risk-adjusted returns relative to its category peers.

In terms of tracking performance, like most of its direct rivals, iShares Core S&P 500 routinely outperforms its benchmark, mainly thanks to favourable withholding-tax differences between the index and the fund, as well as modest securities-lending revenue.

In addition to its low fee and solid performance, we value iShares' strong fund management systems and processes, highly experienced team, and extensive internal network supporting the portfolio managers.

For these reasons, we maintain our Morningstar Analyst Rating of Gold.

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Fundamental View

The S&P 500 was created in 1957. It was the very first market-cap-weighted index of U.S. stocks. Its well-known predecessor, the Dow Jones Industrial Average Index (which was first calculated in 1896), is a price-weighted index. In 1896, weighting stocks based on their share price made sense in that it wasn't very computationally intensive (electricity was still a fairly recent invention back then). Sixty years later, computing power had advanced significantly, making it easier to build and calculate an index that better reflects the overall performance of U.S. large-cap stocks, one that selects and weights its constituents based on their market capitalisation.

Over its history, the S&P 500 has proved a difficult hurdle for many U.S. large-cap equity fund managers to clear. Many attribute active managers' collective struggles to beat index funds to the overall level of market efficiency for U.S. large-cap stocks. Efficiency in this case is meant to indicate the speed and precision with which market participants incorporate new information (economic news, earnings data, and so on) into stock prices (by selling on bad news, buying on good news). Furthermore, given advances in information technology and growth in the portion of investable assets that is managed by an increasingly skilled set of professional investment managers, it can be argued that the market has become ever more efficient over time. However, market efficiency alone does not explain the long-term success of broadly diversified market-cap-weighted index funds.

The second leg of the investment thesis for index funds is their cost advantage. Index funds are inherently less expensive to manage than actively managed alternatives. Their sponsors don't have to pay teams of well-educated and highly credentialed portfolio managers and investment analysts to identify under- or overvalued stocks to be added to or sold from their portfolios. Also, market-cap-weighted index funds have lower turnover relative to actively managed funds. Turnover entails costs such as commissions, bid-ask spreads, and market impact costs that add to the headwinds for active strategies. These operating expenses are the largest and most persistent drag on the performance of actively managed strategies.

That said, market-cap-weighted indexes like the S&P 500 have some noteworthy drawbacks. By owning "the market," investors are relying on other market participants to price stocks on their behalf. Although over long stretches of time market participants have done a good job of valuing stocks, these long horizons have also been marked by episodes of mania and panic. Market-cap indexes are prone to bubbles, as they naturally overweight stocks that have gone up in price and underweight those that have been beaten down. For instance, during the dot-com boom of the late 1990s, the S&P 500 was largely exposed to technology, media, and telecom stocks, which ultimately cratered. When the bubble finally burst, the flagship index fell by more than 40% and took four years to return to its precrash value.

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Alternatives

As an alternative, investors can look to the Vanguard S&P 500 ETF. With an ongoing charge of 0.07%, it is one of the cheapest and best-performing ETFs available among peers.

Various other companies offer ETFs that track the S&P 500, including (but not limited to) SPDR, Lyxor, Amundi, and Xtrackers.

Providers also offer currency-hedged S&P 500 ETFs for an additional cost. IShares offers British pound-, euro-, and Swiss franc-hedged ETFs (ongoing charge: 0.20% each), while UBS offers a suite of currency-hedged S&P 500 ETFs (ongoing charge: 0.22% each).

For broader exposure to the U.S. stock market, there are index funds and ETFs tracking the MSCI USA or the S&P Total Market indexes. The physically replicated UBS MSCI USA ETF levies an ongoing charge of 0.14%, while the Vanguard US Equity Index Accumulation Index charges 0.10%.

Investors can also choose from an expanding menu of strategic-beta funds that offer an alternative to standard market-cap-weighted exposure to U.S. equities. However, it is important to understand that all these strategies can experience long periods of underperformance relative to the broad market.

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AJ Bell Management Limited (company number 03948391), AJ Bell Securities Limited (company number 02723420) and AJ Bell Asset Management Limited (company number 09742568) are authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales at 4 Exchange Quay, Salford Quays, Manchester M5 3EE. See website for full details. AJ Bell procures the provision of the Morningstar Licensed Tools on an “as is” basis and does not guarantee the performance of or accept liability for the Licensed Tools. To the maximum extent permitted by law, AJ Bell excludes liability for the Licensed Tools, including liability for any failure, interruption, delay or defect in the performance of any Licensed Tool, unless it arises as a direct result of the negligence of AJ Bell.
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