SPY vs. VOO: when it comes to investing in the S&P 500, two of the most popular exchange-traded funds (ETFs) are SPY (SPDR S&P 500 ETF Trust) and VOO (Vanguard S&P 500 ETF).
Exchange-Traded Funds (ETFs) like SPY and VOO, which both track the S&P 500 index, have gained massive popularity among investors. These funds allow individuals to invest in the top 500 companies listed in the United States, offering diversified exposure to the stock market. While SPY and VOO are both designed to mimic the performance of the S&P 500, there are notable differences that set them apart. This article provides an in-depth comparison to help you decide which ETF aligns better with your investment strategy.
SPY, or the SPDR S&P 500 ETF Trust, is the oldest ETF in existence, launched in 1993 by State Street Global Advisors. It was the first ETF to track the S&P 500 index and remains one of the largest and most traded ETFs in the world. SPY is well-known for its high liquidity and real-time trading ability, making it a favorite among day traders.
On the other hand, VOO, or the Vanguard S&P 500 ETF, was introduced in 2010 by Vanguard. It also tracks the S&P 500 index, offering exposure to the same 500 companies as SPY. Vanguard’s reputation for low-cost investing carries over to VOO, which has a notably lower expense ratio compared to SPY, attracting buy-and-hold investors seeking long-term growth.
Although SPY and VOO are similar in their core purpose—tracking the S&P 500—they have important differences investors should consider.
1. Expense Ratios
Expense ratios are annual fees expressed as a percentage of your investment. For SPY, the expense ratio is 0.09%, while VOO boasts an industry-leading low expense ratio of just 0.03%. This difference may seem negligible, but over years or decades of investing, those seemingly small fees can add up. Long-term investors often gravitate toward VOO due to this cost-efficiency.
2. Liquidity and Trading Flexibility
SPY outmatches VOO when it comes to liquidity. Its long-standing presence in the market and high trading volume make it ideal for short-term traders and institutional investors. SPY’s bid-ask spread is narrower, allowing cost-efficient trades.
VOO, although not as liquid as SPY, still offers significant trading volume and is well-suited for most retail investors. However, for those planning on frequent trading, SPY’s liquidity advantage could be significant.
3. Structure of the Fund
SPY is structured as a Unit Investment Trust (UIT). This means it does not reinvest dividends automatically; instead, dividends are held in cash until they are distributed to shareholders. VOO, by contrast, is structured as an Open-Ended Fund. Vanguard reinvests dividends as soon as they are received, allowing potential additive returns from compounding. This could give VOO a slight edge for dividend-focused investors.
4. Share Price
Investors should also note the difference in share price between SPY and VOO. Since SPY has been in existence longer, its price per share is generally higher than VOO's. This may influence decisions for those with smaller portfolios or looking to purchase fractional shares.
When evaluating performance, SPY and VOO are nearly identical due to their shared goal of following the S&P 500. Year-by-year, their percentage returns are remarkably similar. However, for investors holding these funds for decades, VOO’s lower expense ratio may slightly enhance returns.
For example, if both SPY and VOO gain 8% annually, and you have invested $10,000, VOO might result in a higher final amount after 30 years due to the reinvestment of savings from expense fees.
Dividend Yield Comparison
The dividend yields of SPY and VOO are also closely aligned since both ETFs invest in the same S&P 500 companies. However, because VOO reinvests dividends quicker, it may offer a marginal advantage over time. SPY’s dividends are commonly paid out in batches based on its UIT structure, which might not be optimal for compounding.
Tax Efficiency
Tax treatment of ETFs is an important consideration for many investors. Both SPY and VOO are relatively tax-efficient, part of what makes ETFs attractive investment vehicles. However, due to differences in how dividends and capital gains are managed, VOO often exhibits slightly better tax efficiency, especially in taxable accounts. Vanguard’s patented share class structure helps minimize taxable events over time.
The choice between SPY and VOO ultimately depends on your individual investment strategy. Here’s a breakdown to help guide your decision-making process:
For Short-Term Traders: SPY is the better choice thanks to its unparalleled liquidity and high trading volume. Day traders and those engaging in frequent buying and selling will benefit from its ease of trading and minimal spread cost.
For Long-Term Investors: Long-term, buy-and-hold investors may prefer VOO due to its lower expense ratio and cost-efficiency. Over decades, the savings on expenses and reinvested dividends could lead to notably higher returns.
For Dividend Investors: VOO’s structure of reinvesting dividends more frequently could yield compounded growth over time, making it the better option for income-focused strategies.
SPY and VOO both offer excellent exposure to the S&P 500, making them reliable choices for a variety of investors. While SPY remains the go-to for traders prioritizing liquidity and flexibility, VOO holds substantial appeal for cost-conscious, long-term investors. Understanding the differences between these ETFs is key to aligning your investment choices with your goals. Depending on how you plan to use them in your portfolio, SPY or VOO may emerge as the clearer winner for your strategy.
When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.
Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.
