Is IVV too concentrated? James Gerrish names 2 ETFs he'd buy instead

The iShares S&P 500 ETF (ASX: IVV) has long been a favourite among Australian investors seeking low-cost exposure to U.S. equities. But after years of extraordinary returns from a handful of technology giants, is it still the best way to invest in American stocks?

James Gerrish and the team at Market Matters are increasingly questioning that proposition, particularly as signs emerge that bond yields may have peaked, potentially setting the stage for a broader equity rally.

While Gerrish remains bullish on US equities, he believes the risk-reward equation is shifting in favour of companies and sectors that have been left behind.

With that in mind, he's identified two ETFs that could be better positioned than IVV for the next phase of the rally.

The problem with market-cap-weighted exposure

There's no disputing IVV's appeal. With an annual management fee of just 0.04%, it provides exposure to approximately 500 of America's largest companies at an exceptionally low cost.

However, its greatest strength is arguably becoming a weakness: the S&P 500's increasing concentration in a handful of technology giants.

"Today, the 10 largest holdings account for ~40% of IVV, with Nvidia (~8.2%), Apple (~7.4%) and Microsoft (~6%) alone representing more than 21% of the ETF," Gerrish says.

"Sector concentration is equally high, with Information Technology accounting for around 40% of the index, rising to almost 60% when Communication Services and Consumer Discretionary are included – sectors which house other technology-driven giants such as Alphabet, Meta, Amazon and Tesla."

In other words, while IVV technically provides exposure to 500 companies, a relatively small group of mega-cap technology stocks is doing much of the heavy lifting.

This isn't a quirk unique to IVV, but an inherent feature of market-cap-weighted investing, where companies with rising market values receive greater weightings, regardless of their underlying fundamentals or valuations.

However, the degree of concentration today is extraordinary by historical standards. The 10 largest stocks represented just 19% of the S&P 500 in 2015, compared with more than 40% by the end of 2025. Even at the height of the dot-com bubble in 2000, their combined weighting was approximately 27%.

Gerrish puts the concentration into perspective:

"Nvidia alone now carries more than four times the weight of the entire Energy sector, while the three largest technology companies collectively outweigh Financials and Industrials combined. That’s a significant concentration of risk for an ETF often viewed as a broadly diversified core holding."

To be sure, Gerrish isn't necessarily bearish on these technology giants, acknowledging their exceptional earnings growth and the long-term opportunities presented by artificial intelligence. However, he believes the risk-reward equation is becoming more attractive elsewhere.

ETF 1: Betashares S&P 500 Equal Weight Currency Hedged ETF (ASX: HQUS)

HQUS offers a straightforward solution to the S&P 500's concentration: own the same companies, but give each approximately equal weighting.

Unlike IVV, HQUS allocates approximately 0.2% to each constituent at quarterly rebalancing, substantially reducing the influence of mega-cap technology stocks. This increases exposure to sectors including financials, industrials, healthcare and consumer discretionary.

Gerrish believes these economically sensitive businesses could outperform if bond yields stabilise and the U.S. equity rally broadens. 

Another important distinction is currency hedging.

"With the $A currently trading around US69c, this removes much of the currency risk associated with investing in US equities if the $A strengthens, as we believe it will," Gerrish says.

HQUS charges a 0.32% management fee, considerably higher than IVV's 0.04%, but Gerrish considers the additional cost reasonable given the potential diversification benefits.

ETF 2: Vanguard Global Value Equity Active ETF (ASX: VVLU)

While HQUS broadens exposure within the US, VVLU takes diversification further, investing in approximately 1,000 international companies selected using a quantitative value strategy.

Rather than favouring the largest companies, VVLU targets businesses trading at attractive valuations relative to earnings, book values and cash flows.

This provides exposure to relatively inexpensive companies across financials, industrials, healthcare and energy.

"Importantly, VVLU is a global strategy rather than an ex-US fund, meaning it still invests in American companies, alongside stocks in Europe, Japan and other developed markets," Gerrish says.

Unlike HQUS, the investment case doesn't necessarily depend on falling bond yields.

"While value stocks don’t necessarily require falling yields to outperform, a more balanced economic environment, where earnings growth extends beyond mega-cap technology, would be supportive."

How do the three ETFs compare?

We know Livewire readers love getting into the nitty-gritty, so I've done some digging into the key metrics to see how these three ETFs stack up.

IVV wins on cost, charging just 0.04% annually, compared with 0.32% for HQUS and 0.28% for VVLU.

However, HQUS and VVLU trade on substantially lower aggregate P/E ratios of 17.6 and 11.5 times, respectively, compared with IVV's 29.4 times. Both also offer higher trailing 12-month dividend yields of 2.7% and 2.6%, versus IVV's 1.1%, alongside significantly less exposure to individual technology giants.

The total cumulative returns of the three ETFs also tell an interesting story.

Now, take this with a grain of salt. We can only make a fair comparison from July 2024, when HQUS listed. Since then, markets have weathered Liberation Day, rising bond yields, persistent inflation concerns, and spectacular AI-driven rallies and corrections.

Yet through all that turbulence, VVLU (+48.7%) has emerged as the strongest performer, outperforming both IVV (+37%) and HQUS (+29%).

The bond yield wildcard for a Santa rally

Gerrish's outlook is potentially contrarian, given stubborn inflation has repeatedly pushed US and global bond yields higher, sometimes to multi-decade highs.