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With the Vanguard S&P 500 ETF (VOO) officially overtaking the SPDR S&P 500 ETF Trust (SPY) as the world’s largest ETF, it is natural to assume the long-awaited dethroning of SPY can be boiled down to just fees.
It’s a fair assumption given the way the ETF space has applied fee pressure across the financial services industry, and it is especially apparent considering VOO is a product of low-cost innovator The Vanguard Group.
In fact, even though VOO charges 3 basis points while SPY charges 9 basis points, the growth and popularity of VOO likely says more about the growing appeal of ETFs in general, especially as the vehicle of choice among financial advisors.
But as similar as the two ETF heavyweights may appear on the surface, the nuanced distinctions justify VOO’s growing momentum while leaving room for SPY to reclaim ground atop the mountain in the future.
“VOO has gained in popularity as it’s a fan favorite in online personal investing communities like Bogleheads and Reddit,” said Sarah Maitre, founder of Camriel Advisors in Mt. Shasta, California.
“Vanguard is regularly favored in these communities as the best option for low fees, good service, and being a large, stable company that’s unlikely to default,” she added.
SPY vs. VOO
VOO was launched in 2010, 17 years after SPY debuted as the first ETF for U.S. investors. Even though the two ETFs track the same S&P 500 index, they each have unique characteristics that justify their size and longevity.
“SPY stands out due to its extensive options market, offering more weekly, quarterly, and monthly options than VOO,” said Deepak Goyal, founder of 3D Holistic Wealth in Irvine, California.
“This is critical for clients requiring sophisticated options strategies,” he added. “Also, SPY options generally exhibit higher open interest and trading volume, which translates to narrower bid-ask spreads compared to VOO options.”
In essence, even though SPY’s expense ratio is three times that of VOO, the liquidity advantage can make SPY more cost-effective for options traders.
A closer look at the two seemingly identical ETFs also highlights that SPY was created all those years ago by State Street Global Advisors as a Unit Investment Trust, which is unique from the open-end ETF structure of VOO and most other ETFs.
For financial advisors working with long-term investors, SPY’s UIT structure introduces a lag time for reinvesting dividends, which gives VOO investors a slight compounding advantage.
Goyal said VOO’s structure “potentially makes it more tax efficient than SPY.”