The S&P 500 is arguably one of the best investments of our generation. An investment in the top 500 stocks in the United States gives you broad exposure to the US economy. Over long periods, the S&P 500 has historically returned around 10% per year, an impressive result. If you want to buy all stocks in the index at once, two of the most popular routes are S&P 500 Exchange Traded Funds (ETFs) from State Street Global Advisors (SPY) and Vanguard (VOO).
Here’s a look at SPY vs. VOO to help you pick the best S&P 500 ETF for your financial goals.
Fund Overview
SPDR S&P 500 ETF Trust (SPY)
The SPDR S&P 500 ETF Trust, often referred to by its ticker symbol SPY, is the oldest US-listed ETF. Launched in January 1993, it’s a highly traded S&P 500 fund that provides individual and institutional investors with a highly liquid opportunity to trade the largest companies nationwide.
While the low annual management fee is slightly under 0.10%, it’s not the cheapest S&P 500 ETF available. Regardless, it remains one of the largest ETFs on the market and an effective way to make a diverse investment with a single purchase.
Vanguard S&P 500 ETF (VOO)
The Vanguard S&P 500 ETF, with the ticker VOO, became available in September 2010. It’s also available as a mutual fund, but the lower annual investment cost, higher liquidity, and potentially better tax treatment make the ETF version a better choice for the average individual investor.
Vanguard is a pioneer of low-cost investment funds, and the 0.03% expense ratio makes it a nearly unbeatable deal. The fund is designed explicitly to minimize costs and reduce your tax liability. That’s a big win for long-term investors.
If you’re curious, we previously compared the mutual fund (VFIAX) and ETF (VOO) versions.
Expense Ratios and Costs
Because both funds closely mirror the performance of the S&P 500 index, the primary difference between the two lies in their expense ratios.
SPY charges about 0.0945% annually, while VOO costs 0.03%. Although both are extremely low-cost, the annual management fee for SPY is more than three times what you pay for VOO. If you put $10,000 into each, here’s what you’d pay over time, assuming a 7% annual return and no additional investment:
Over several decades, you can see the diverging fees make VOO a better pick for cost. While SPY is arguably better for short-term, active investors, VOO is better in the long term. As we’re looking at saving and investing for retirement and other long-term goals, VOO is our top choice.
More information here:
How Do You Evaluate and Compare Mutual Funds and Exchange Traded Funds?
Performance Comparison
Over the last 10 years, we’ve seen net returns of 14.48% from SPY and 14.58% from VOO. Since both track the S&P 500 so closely, the difference is primarily due to the fees we discussed above. Over multiple decades, these will diverge more and more due to the difference in costs.
Ultimately, total performance is the most important aspect of investing. If all else is equal and VOO charges lower fees, it’s no surprise that it leads to the best performance, again earning it our stamp of approval over SPY.
Dividend Yields
Many companies in the S&P 500 pay annual dividends, and holders of SPY and VOO get their share. As of this writing, the dividend yield of these funds is:
SPY: 1.16%
VOO: 1.10%
Again, the difference between the two is relatively low, but SPY pays about 0.06% more.
Liquidity and Trading Volume
VOO has grown to about twice as big as SPY, but SPY trades with a higher average daily trading volume. That means it’s more liquid and easier to sell. Both are highly liquid and easy to get rid of, but SPY is more active. While that topic matters more to institutional investors with large trading volumes, it’s worth taking note of when comparing SPY vs. VOO head-to-head.
Tax Efficiency
VOO is structured as an open-ended fund, which allows it to use in-kind redemptions when investors sell shares. This process helps the fund avoid triggering taxable capital gains, making VOO generally more tax-efficient for long-term investors.
In contrast, SPY is structured as a Unit Investment Trust (UIT), and it cannot use in-kind redemptions in the same way. As a result, SPY may be forced to sell securities to meet redemptions, which can lead to higher capital gains distributions for shareholders.
While the difference is minimal, again, VOO edges out SPY for the average physician with long-term investment goals.
More information here:
FXAIX vs. VOO: Which Index Fund Is Best?
ITOT vs. VOO: Which S&P Index Fund Is Best?
The Bottom Line: SPY vs. VOO
SPY and VOO both track the S&P 500 closely, and they are strong investment options. SPY’s higher liquidity makes it attractive for investors who value trading flexibility. Meanwhile, VOO’s lower costs and tax efficiency are better suited for long-term, buy-and-hold investors.
For The White Coat Investor community, we can confidently say that VOO is the better choice for most of our needs. And I, for one, put my money where my mouth is. VOO plays a significant role in my portfolio, and I don’t have any shares of SPY. If you were my sibling asking me which is better, VOO or SPY, I’d point you to VOO as the winner.
[FOUNDER’S NOTE BY DR. JIM DAHLE: The “Too Long, Didn’t Read” version of this post is that both of these are excellent investments, and they can be used effectively in a portfolio for a large cap US stock allocation. However, I do not use funds that track the S&P 500 index at all. I prefer more diversified Total Stock Market (TSM) index funds, due to the additional diversification and lack of performance drag from “front-running.” Recently, people have been pointing out that S&P 500 funds have outperformed TSM funds even over very long time periods, but that’s actually just recency bias, a form of performance chasing. Over the long term, smaller stocks have generally outperformed larger stocks (partially due to risk and partially due to investor behavior), and the S&P 500 excludes smaller stocks included in a TSM fund. Some people (including me) have used S&P 500 funds when a TSM fund is not available in their retirement plan, and that’s fine. Just as the differences between VOO and SPY are very, very small, so are the performance differences between a 500 index fund and a TSM fund; their correlation in the past has been close to 0.99. They’re all fine to use.
But if you have decided to use an S&P 500 ETF for whatever reason, Eric has made a compelling argument for VOO over SPY. While newer (although still very well-established) and less liquid (although still very liquid), VOO has a lower expense ratio, and it’s run by a company I trust more. In addition, the fact that it is a true ETF/fund and not a Unit Investment Trust makes it slightly more tax-efficient if you are buying it in a taxable account. But if you have gotten to the point where you are worrying about the differences between VOO and SPY, you are operating at a very high level of financial literacy.
On the list of things that matter in reaching your financial goals, this one cannot possibly be in the top 100.]
Which S&P 500 index fund do you prefer and why? Are the minimal advantages that VOO holds over SPY enough to convince you to switch to VOO if you already hold SPY? What other S&P 500 funds do you hold and why?
