Here’s a look at SPY vs. VOO to help you choose 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 SPYis the oldest US-listed ETF. Launched in January 1993, it is a highly traded S&P 500 fund that offers individual and institutional investors a highly liquid opportunity to trade the largest companies across the country.
Although the low annual management fee is just under 0.10%, this is 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 one purchase.
VANGUARD S&P 500 etf (VOO)
The Vanguard S&P 500 ETF, with the ticker FLIGHTcame onto the market in September 2010. It is also available as a mutual fund, but the lower annual investment costs, higher liquidity and potentially better tax treatment make the ETF version a better choice for the average individual investor.
Vanguard is a pioneer in low-cost mutual funds, and its 0.03% expense ratio makes it a virtually unbeatable deal. The fund is explicitly intended 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.
Expenditure ratios and costs
Because both funds closely mirror the performance of the S&P 500 index, the main difference between the two lies in their expense ratios.
SPY charges approximately 0.0945% annually, while VOO charges 0.03%. Although both are extremely affordable, 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 decades you will see that the different reimbursements make VOO a better choice in terms of costs. While SPY is arguably better for active investors in the short term, VOO is better in the long term. When we look at saving and investing for retirement and other long-term goals, VOO is our top choice.
More information here:
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Performance comparison
Over the past ten years we have seen a net return of 14.48% at SPY and 14.58% at VOO. Because both track the S&P 500 so closely, the difference is mainly due to the fees we discussed above. Over decades, these will become increasingly divergent due to the difference in costs.
Ultimately, overall performance is the most important aspect of investing. All else being equal and VOO charges lower fees, it’s no surprise that this leads to the best performance, once again earning our approval over SPY.
Dividend yields
Many companies in the S&P 500 pay annual dividends, and holders of SPY and VOO get their share. At the time of writing, the dividend yield of these funds is:
SPY: 1.16%
FLIGHT: 1.10%
Again, the difference between the two is relatively small, but SPY pays about 0.06% more.
Liquidity and trading volume
VOO has grown to about twice the size of SPY, but SPY trades with a higher average daily trading volume. That means it is more liquid and easier to sell. Both are very liquid and easy to remove, but SPY is more active. While this topic is more important for institutional investors with large trading volumes, it is worth taking into account when comparing SPY vs VOO head-to-head.
Tax efficiency
VOO is structured as an open fund, which allows it to make use of in-kind redemptions when investors sell shares. This process helps the fund avoid taxable capital gains, making VOO overall more tax efficient for long-term investors.
SPY, on the other hand, is structured as a Unit Investment Trust (UIT) and cannot use in-kind redemptions in the same way. As a result, SPY may be forced to sell securities to meet redemptions, which could lead to higher capital gains distributions for shareholders.
While the difference is minimal, VOO outperforms SPY for the average physician with long-term investment goals.
More information here:
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The bottom line is: SPY vs. VOO
SPY and VOO both closely track the S&P 500, and they are strong investment options. SPY’s higher liquidity makes it attractive to investors who value trading flexibility. Meanwhile, VOO’s lower costs and tax efficiency are better suited to 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 an important role in my portfolio and I do not own any SPY shares. If you were my brother or sister asking me which is better, VOO or SPY, I would choose you 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 has over SPY enough to convince you to switch to VOO if you already own SPY? What other S&P 500 funds do you hold and why?
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