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

The iShares Core S&P/ASX 200 ETF (ASX: IOZ) is one of the largest ETFs with more than $3.3 billion of net assets as of 31 October 2022. However, it’s not quite as large as the main ASX-focused offering from Vanguard, the Vanguard Australian Shares Index ETF (ASX: VAS).

IOZ: solid option, though not the cheapest

IOZ has one of the lowest annual management fees out of all the ETFs on the ASX. IOZ has a yearly management cost of just 0.09%. So with a $10,000 investment, the annual cost is just $9 of management fees. That’s exceptionally low.

Remember, the fee doesn’t come out of your bank account. The ETF provider, in this case Blackrock/iShares, takes a small cut out of the fund’s value automatically.

However, IOZ isn’t the lowest-cost ETF that tracks blue-chip ASX shares. The BetaShares Australia 200 ETF (ASX: A200) has a management fee of just 0.07% — the share holdings and position sizing of IOZ and A200 are almost identical.

A200 and IOZ have such similar expense ratios that the choice between the two is basically down to personal preference.

Which index does the IOZ ETF track?

The IOZ ETF is built to track the S&P/ASX 200 Index (ASX: XJO) – 200 of the biggest businesses listed on the ASX.

This is a very similar index (but not the same) that Vanguard Australian Shares Index ETF (ASX: VAS) follows, VAS tracks the S&P/ASX 300 Index (ASX: XKO).

Both VAS and IOZ are invested in the 200 biggest businesses, but VAS also has a very small position in the next 100 largest businesses as well.

If you’re looking for more exposure to the ASX blue chips then the IOZ could be the better choice over VAS.

Alternatives to the IOZ ETF

These are some of the main alternatives to IOZ:

Vanguard Australian Shares Index ETF (ASX: VAS) – This is the most popular ASX ETF in terms of how much money investors have allocated to the ETF. VAS has more invested in it than IOZ, and any of the other alternatives mentioned below. VAS typically experiences a little more volatility than the A200 and IOZ because it’s invested in the top 300, not 200. The extra 100 holdings are smaller ASX companies and usually move up and down more (i.e. ‘more volatility’). VAS ETF currently has an annual management fee of 0.10%, though this may reduce in time.

BetaShares Australia 200 ETF (ASX: A200) – The A200 is the lowest-cost ASX-focused ETF (at the moment) with an annual fee of just 0.07%. It has very similar holdings to IOZ, with similar position weightings.

SPDR S&P/ASX 200 ETF (ASX: STW) – This ETF essentially has the same portfolio as A200 and IOZ. It’s one of the oldest-running ETFs as well. However, it has an annual fee of 0.13%. In the grand scheme of things, it’s not much more expensive than IOZ, VAS and A200. But, STW is almost twice as costly as the A200.

Vanguard Australian Shares High Yield ETF (ASX: VHY) – This ETF, as indicated by the name, is invested in large ASX shares that are expected to pay a relatively high dividend yield. VHY usually has a portfolio of between 65 to 80 businesses. It’s more concentrated in its positions than IOZ, has a higher projected dividend yield and has a higher management fee of 0.25% per year.

Can IOZ be a core ETF?

The IOZ ETF seems like one of the most cost-effective ways to invest in many of the biggest businesses in Australia. With an annual fee of just 0.09%, IOZ costs almost nothing to be invested in this option for the long-term.

However, the ETF doesn’t offer much exposure to smaller businesses in Australia, which is where investors may find some of the best ideas for growth. So, it may work best with other investments that give more global and/or smaller ASX share exposure.

In summary, the IOZ ETF offers a number of the things that investors can like – diversification, low fees, dividends and franking credits.

However, keep in mind that the IOZ ETF has very similar holdings to VAS, STW, A200 and VHY, so there could be unnecessary overlap if an investor holds more than one of these investments.

IOZ largest positions (November 2022)

1. BHP Group Ltd
2. Commonwealth Bank of Australia
3. CSL Ltd
4. National Australia Bank Ltd
5. Westpac Banking Corp
6. Australia and New Zealand Banking Group
7. Woodside Energy Group Ltd
8. Macquarie Group Ltd
9. Wesfarmers Ltd
10. Telstra Group Ltd

IOZ dividend yield

The IOZ ETF structure acts as a conduit to ‘pass on’ dividends and franking credits from the share holdings to the investor of the ETF. The dividends from those businesses effectively decide the dividend yield of the ETF itself.

Given the diversified nature and long-term preference for Australian companies to pay generous dividends, investors could expect a sustainable dividend yield of between 3% and 5%, plus some franking credits. However, please remember that in Australia ETFs are required to pay back ‘capital gains’ as well as income when a distribution is paid to investors — meaning, the cash you receive in an IOZ distribution might not be the true sustainable yield on the portfolio of shares.

Risks

The risk level of the IOZ ETF is at a similar level to other ASX-focused ETFs, such as A200. Compared to bonds, however, the IOZ ETF would likely be much more volatile (which is seen as riskier) over the long run.

For some investors, it may be worth noting that IOZ is significantly weighted to businesses that do business in Australia, with an outsized allocation to banks and resources – two things that Australia is known for. Investors may want to diversify with an investment option, or options, that provide exposure to the international share market.

However, the IOZ ETF may be a little less risky than industry-specific or thematic ETFs like CLDD, ESPO or ERTH.

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