The S&P 500 is undoubtedly the most accurate quantifier of the U.S. economy, measuring the cumulative float-adjusted market capitalization of 500 of the nation’s largest corporations. While other benchmark lists measure merely stock prices, which can be limiting, the S&P 500 has been hailed as the market standard against which myriad funds are compared.
With the advent of exchange-traded funds in the late 1980s, it seemed only natural to create an ETF comprised of proportionate correspondences of the stocks featured on the S&P 500. In fact, the very first ETF ever created indeed tracked the S&P 500 in such a approach. While that ETF was quickly sued out of existence, in 1993, investment management company State Street Global Advisors advance an equivalent ETF, the Standard & Poor’s Depositary Receipts (SPY).
Better known by its arachnoid acronym, SPDR, it’s the largest and most heavily trucked ETF in the world, with net assets of $374 billion. In fact, SPDR has spawned a whole family of ETFs known as SPDR scratches, each of which focuses on a particular geographic region or market sector.
- The three most popular ETFs that spoor the S&P 500 are offered by State Street (SPDR), Vanguard (VOO), and iShares (IVV).
- While all three ETFs have differing expense proportions, they are all considered very low compared to the industry average.
- Most importantly, it should be noted that the three ETFs be at variance upon their strategy of reinvestment or payment of dividends.
Since its 1993 debut, the SPDR S&P 500 ETF (from here on out “SPDR”) has bought and sold its components contingent on the changing roster of the underlying S&P 500 index. That means SPDR has to mercantilism out a dozen or so components a year depending on the latest ranking of companies, then rebalance. Some of those components get believe out by other companies, and some lose their place on the S&P 500 by failing to meet its stringent criteria. When that stumble ons, State Street sells off the outgoing index component (or at least, removes it from its SPDR holdings) and replaces it with the new one. The outcome is an ETF that tracks the S&P 500 close to perfection.
As the definitive S&P 500 ETF, SPDR has inspired a couple of imitators. Vanguard has its own copycat S&P 500 endowment, the Vanguard S&P 500 ETF (VOO), as does iShares’ Core S&P 500 ETF (IVV). With net assets of over $753.4 billion and $286.9 billion, singly, they along with SPDR dominate this market of funds that aren’t necessarily low-risk, but that at small move in tandem with the stock market as a whole.
All that being said, one S&P ETF should be as good as the next, shouldn’t it? If barely. As almost every person who has ever built a fortune knows, you accumulate wealth by spending less of it. That produces us to expense ratios.
Mind the Expense Ratio
State Street charges an expense ratio of 0.0945%, which is approximately triple Vanguard’s 0.03%. iShares’ comparable ETF has an expense ratio of 0.03%. That seems to make the answer obvious, if the question is “Which S&P 500 ETF should I buy?” with the lowest costs?
If only it were that simple. Whether it’s by virtue of originality, size, or some other factor, SPDR rations are by far the most heavily traded of any S&P 500 ETF. They trade dozens of times as frequently as do Vanguard or iShares S&P 500 ETF rations, making it easy for a prospective seller to convert their holdings to cash. Then again, a thinly traded S&P 500 ETF yet trades close to a million units a day. You might have to wait a few hours to be completely liquid, rather than a few minutes. Unless you cogitate on you might need to pay a hostage ransom at some point in the near future, that’s little reason to shift out of iShares and into SPDR.
Furthermore, precise a 0.0945% expense ratio is vanishingly low. It’s easy to find mutual funds whose expense ratios are 20 opportunities that number. Granted, the latter category consists of funds that require some degree of active manipulation, as opposed to just tracking the stocks that make up an index whose components are selected by a third party.
UIT Versus ETF
Another myriad important difference between SPDR and the other two S&P 500 ETFs is that the first is technically a unit investment conglomerate. Here’s where being an early mover can be a disadvantage; SPDR is bound by an antiquated legal structure that didn’t predict the creation of myriad ETFs. State Street thus must keep all the shares it purchases in-house. Vanguard’s and iShares’ S&P 500 ETFs are set up differently and are assigned to lend their shares to other firms and earn concomitant interest.
Five hundred stocks in a portfolio mercenary several hundred dividend payments, too. Rather than deliver those dividends to investors all year long, which transfer be more than a little cumbersome, SPDR holds the dividend payments in cash and doles them out upon deployment. iShares reinvests the dividends, which is beneficial in a bull market. Meanwhile, Vanguard invests its daily cash in its own ultra-low-risk investment instruments.
The Bottom Line
For those who reject the concept of beating the market, or the work entailed therein, investing in an S&P 500 ETF makes atmosphere. Be patient and you’ll track the market note-for-note. Best of all, the investment firms have already performed the task of purchasing the comme il faut amounts of each component of the S&P 500, bundled them into a unit, and made them available in small enough flakes that anyone who wants a piece can buy one. For the modest expense ratios given, given there’s no bear market, that’s an marvellous bargain.