Your browser does not support JavaScript!

Choosing Between SPY and VOO

General Report January 14, 2025
goover

TABLE OF CONTENTS

  1. Summary
  2. Overview of S&P 500 ETFs
  3. Key S&P 500 ETFs
  4. Performance Comparison of SPY and VOO
  5. Investment Strategies Using S&P 500 ETFs
  6. Conclusion and Investor Considerations
  7. Conclusion

1. Summary

  • S&P 500 ETFs such as SPDR S&P 500 ETF Trust (SPY) and Vanguard S&P 500 ETF (VOO) are explored in this report to guide investors in making informed decisions. A detailed examination is presented on aspects including performance metrics, expense ratios, liquidity considerations, and income suitability for retirement investing. The SPY, characterized by its high liquidity, offers a more expensive option with an expense ratio of 0.095%, while VOO presents a cost-effective alternative with an expense ratio of 0.03% and a higher dividend yield. The discussion also covers other ETFs like iShares Core S&P 500 ETF (IVV), ideal for long-term portfolios due to its low expense ratio and tax efficiency, and the Invesco S&P 500 Equal Weight ETF (RSP), which provides sector balance through equal weighting.

2. Overview of S&P 500 ETFs

  • 2-1. Definition and Importance of S&P 500 ETFs

  • S&P 500 ETFs offer investors various methods to invest in the 500 largest publicly traded companies in the United States. These funds serve as a crucial tool for gaining broad market exposure and are essential for various investment strategies, including retirement investing.

  • 2-2. Historical Context and Development of S&P 500 Index

  • The S&P 500 Index has a rich history, first developed in 1923 as a small collection of securities. In 1957, it was expanded to 500 stocks and renamed the S&P 500. The index tracks market capitalization-weighted stocks that reflect the performance of the U.S. stock market, and the first ETF ever created tracked this index, known by the ticker SPY.

  • 2-3. Criteria for Inclusion in the S&P 500 Index

  • To be included in the S&P 500 Index, stocks must meet specific criteria: they must have a market capitalization exceeding $6.1 billion, a minimum dollar value of $1, and monthly trading volume of at least 250,000 shares. These criteria ensure that only significant, financially stable companies are represented in the index.

3. Key S&P 500 ETFs

  • 3-1. SPDR S&P 500 ETF (SPY)

  • The SPDR S&P 500 ETF (SPY) is the oldest and largest of the S&P 500 index ETFs, boasting a significant asset base. It has an expense ratio of 0.095%, making it one of the more expensive options available. Due to its high liquidity, SPY has become a favored choice among traders, although long-term investors are often advised to consider cheaper alternatives. SPY is known for its vast trading volume and is a unit investment trust that does not reinvest dividends, thus shielding investors from capital gains taxes.

  • 3-2. Vanguard S&P 500 ETF (VOO)

  • The Vanguard S&P 500 ETF (VOO) is popular among investors, often recognized by its ticker symbol, VOO. It features a low expense ratio of 0.03%, making it one of the more cost-effective options available. VOO has been utilized widely in 401(k) plans and is commonly included in IRA accounts. Since its inception, VOO has closely mirrored the S&P 500's performance with a return of 13.49% against the index's 13.52%. It does not match the trading volume of SPY but still maintains substantial liquidity.

  • 3-3. iShares Core S&P 500 ETF (IVV)

  • The iShares Core S&P 500 ETF (IVV) is regarded as an excellent investment option, with a minimal expense ratio of 0.03%. It closely tracks the S&P 500 index and has shown a 12-month median tracking difference of -0.04%. IVV began trading in May 2000 and has returned 5.59% since inception. Although smaller in asset size than SPY, IVV offers ample liquidity and daily disclosure of its holdings. Over the past decade, this fund has not incurred capital gains, providing tax advantages for high earners.

  • 3-4. SPDR Portfolio S&P 500 ETF (SPLG)

  • The SPDR Portfolio S&P 500 ETF (SPLG) is a newer addition to the ETF market, and it seeks to track the total return of the S&P 500. With a very low expense ratio of 0.02%, SPLG is positioned as an ideal option for long-term investors looking for cost efficiency. This fund is designed to appeal particularly to retail investors, as it allows for lower share prices and remains aligned closely with the S&P 500 index.

  • 3-5. Invesco S&P 500 Equal Weight ETF (RSP)

  • The Invesco S&P 500 Equal Weight ETF (RSP) specifically targets the S&P 500 equal weight index, where its holdings are arranged with an equal weighting strategy. Established to invest disproportionately in mid-cap stocks, RSP diversifies its investments into various sectors including IT, Industrials, Healthcare, Financials, Consumer Discretionary, and others. This diversification strategy aims to smooth out any potential volatility associated with individual stocks.

  • 3-6. Schwab U.S. Large Cap ETF (SCHX)

  • The Schwab U.S. Large Cap ETF (SCHX) tracks a broad array of the largest-cap stocks in the U.S., focusing on 780 large-cap stocks, thus offering exposure to companies beyond the strict limits of the S&P 500 index. Although SCHX's top holdings are similar to IVV, VOO, and SPY, it has a lower concentration of assets in the top names. Its expense ratio is competitive at 0.03%, and it closely follows the S&P 500's performance.

4. Performance Comparison of SPY and VOO

  • 4-1. Expense Ratios: SPY vs. VOO

  • The Vanguard S&P 500 ETF (VOO) offers a lower expense ratio of 0.035% compared to the SPDR S&P 500 ETF (SPY), which has an expense ratio of 0.095%. This lower cost structure can lead to higher net returns for investors, particularly those investing large sums or planning for long-term goals such as retirement.

  • 4-2. Historical Performance: CAGR Analysis

  • Over the past decade, the SPDR S&P 500 ETF (SPY) has achieved a compound annual growth rate (CAGR) of 12.8%, showcasing a strong performance history. In comparison, the Vanguard S&P 500 ETF (VOO) has posted a CAGR of approximately 12.4%. SPY's longer operating history provides a more extensive dataset that can be beneficial for analyzing its performance across different market conditions.

  • 4-3. Dividend Yield Comparison

  • VOO typically provides a higher dividend yield than SPY, making it particularly appealing to investors focused on generating income from their investments. This aspect is crucial for retirees who prioritize income generation as part of their investment strategy.

  • 4-4. Liquidity and Trading Volume Analysis

  • SPY is one of the most liquid ETFs available, characterized by high daily trading volumes. This liquidity is advantageous for active traders who appreciate the ability to enter and exit positions swiftly. Both SPY and VOO aim to closely replicate the performance of the S&P 500 Index; however, they have minor variations in tracking accuracy known as tracking errors, which have historically been minimal for both funds.

5. Investment Strategies Using S&P 500 ETFs

  • 5-1. Long-Term Investment Horizons

  • S&P 500 ETFs, including SPY and VOO, are particularly appealing for investors with long-term investment horizons, especially those saving for retirement. These ETFs provide broad exposure to the economy, which helps facilitate growth through various market cycles with a single investment. They are versatile enough to serve a range of investment objectives, from capital appreciation to portfolio diversification and risk management.

  • 5-2. Portfolio Diversification and Risk Management

  • Investors can use S&P 500 ETFs like SPY and VOO to manage their portfolios' risk through diversification. By tracking the S&P 500 Index, these ETFs include shares of 500 of the largest companies in the U.S., which helps capture overall market trends and growth while spreading out risk across multiple sectors. This characteristic makes S&P 500 ETFs suitable for both passive and active investment strategies, adapting to an investor's changing financial goals.

  • 5-3. Cost Efficiency and Tax Implications

  • In terms of cost efficiency, VOO offers a significantly lower expense ratio (0.035%) compared to SPY (0.095%), making it a more economical choice for cost-conscious investors. Lower costs can have a substantial positive impact on net returns, particularly important in long-term investments such as retirement accounts. Additionally, VOO typically provides a higher dividend yield, appealing to investors focused on income generation.

6. Conclusion and Investor Considerations

  • 6-1. Summary of Key Findings

  • This report highlights the comparative strengths of various S&P 500 ETFs, primarily focusing on SPY and VOO. Notably, SPY offers unmatched liquidity and a long history of performance, while VOO presents a more cost-effective investment option with higher dividend yields. Both funds serve as excellent choices for retirement investors.

  • 6-2. Factors Influencing ETF Choice

  • The decision to choose between SPY and VOO hinges on individual investment goals and preferences. Key considerations include liquidity, cost structures, performance history, and dividend yields. SPY is favored for its liquidity and historical performance data, making it popular among active traders. In contrast, VOO is preferred by cost-conscious investors due to its lower expense ratio and higher dividend yields.

  • 6-3. Final Recommendations for Retirement Investing

  • Investors are encouraged to consider their financial objectives and risk tolerance when selecting an ETF for their portfolios. While both SPY and VOO are strong options for retirement investing, the best choice ultimately depends on the individual investor's specific needs and preferences.

Conclusion

  • The findings emphasize key differences and advantages between various S&P 500 ETFs. SPDR S&P 500 ETF Trust (SPY) is ideal for traders needing liquidity and quick market access, thanks to its high trading volume. Conversely, Vanguard S&P 500 ETF (VOO) serves long-term investors well with its lower expenses and dividend yield benefits, crucial for retirement plans. iShares Core S&P 500 ETF (IVV) provides additional tax efficiency for a long-term hold. Investors should base their choice on individual financial goals, risk tolerance, and investment timelines. As the market evolves, these ETFs continue to offer versatile tools for diverse investment strategies, paving the way for potential growth and risk management while staying aligned with the broad market trends. Future ETF developments are anticipated to enhance these strengths, adapting to investors' growing demands for cost-efficiency, liquidity, and strategic alignment in changing economic climates.

Glossary

  • SPDR S&P 500 ETF Trust (SPY) [ETF]: The SPDR S&P 500 ETF Trust (SPY) is the first ETF listed in the United States, launched in 1993. It tracks the S&P 500 Index and is known for its high liquidity and significant trading volume, making it a favored choice among both institutional and retail investors.
  • Vanguard S&P 500 ETF (VOO) [ETF]: The Vanguard S&P 500 ETF (VOO) was launched in 2010 and is designed for cost-conscious investors. It has a lower expense ratio compared to SPY and typically offers a higher dividend yield, making it attractive for long-term investment and retirement accounts.
  • iShares Core S&P 500 ETF (IVV) [ETF]: The iShares Core S&P 500 ETF (IVV) boasts a low expense ratio and closely tracks the S&P 500 Index. It is recognized for its liquidity and tax-efficient structure, making it suitable for long-term portfolios.
  • SPDR Portfolio S&P 500 ETF (SPLG) [ETF]: The SPDR Portfolio S&P 500 ETF (SPLG) was introduced to attract long-term investors seeking lower costs. With a minimal expense ratio, it aims to provide comprehensive exposure to the S&P 500 Index.
  • Invesco S&P 500 Equal Weight ETF (RSP) [ETF]: The Invesco S&P 500 Equal Weight ETF (RSP) applies an equal weighting strategy to the S&P 500, thus offering diversified exposure across all constituents, which may appeal to investors looking for balanced risk across sectors.
  • Schwab U.S. Large Cap ETF (SCHX) [ETF]: The Schwab U.S. Large Cap ETF (SCHX) tracks a broader set of large-cap stocks, including those outside the S&P 500, providing additional diversification while maintaining low expense ratios.

Source Documents