SPY, IVV, and VOO: Comparing the Top S&P 500 ETFs

The S&P 500 is one of the world’s most closely followed stock indices, encompassing 500 of the largest publicly traded companies in the U.S. and offering diversified market exposure. Among the most popular ETFs tracking this index are the SPDR S&P 500 ETF (SPY), iShares Core S&P 500 ETF (IVV), and Vanguard S&P 500 ETF (VOO). But what are the differences between these three ETFs, and how should investors choose between them? This article will compare them based on expense ratio, liquidity, tracking error, and dividend handling.

1. Expense Ratio: VOO and IVV Take the Lead

Expense ratios are a key factor for long-term investors. Although all three ETFs track the same index, there are slight differences in their management fees:

• SPY: 0.09%

• IVV: 0.03%

• VOO: 0.03%

In terms of cost, IVV and VOO are notably cheaper than SPY, making them preferable for long-term holders. For an investment base of $10,000, SPY’s annual fee would be $9, while IVV and VOO would only cost $3. Over time, this difference in fees can impact total returns.

2. Liquidity: SPY Reigns Supreme

In terms of liquidity, SPY has the highest average daily trading volume, significantly exceeding that of IVV and VOO. This makes SPY particularly appealing to frequent traders, as higher trading volumes translate to smaller bid-ask spreads and faster execution speeds:

• SPY: Average daily trading volume in the tens of billions, offering the best liquidity.

• IVV: High liquidity but slightly below SPY.

• VOO: Follows closely behind IVV, still suitable for most investors.

For short-term traders or investors who need to buy and sell quickly, SPY’s high liquidity is an advantage, while IVV and VOO are more suitable for long-term investing.

3. Tracking Error: IVV and VOO Are More Stable

Tracking error measures the difference between an ETF’s performance and its underlying index. All three ETFs aim to closely mirror the S&P 500, but IVV and VOO typically perform better in terms of tracking error, while SPY may occasionally deviate slightly from the index.

• SPY: Utilizes a unit trust structure, which affects its reinvestment of dividends, leading to slightly higher tracking error.

• IVV and VOO: Both are open-ended ETFs with more flexible dividend reinvestment, generally resulting in smaller tracking errors.

In actual performance, IVV and VOO show lower annual tracking errors, staying closer to the S&P 500’s performance.

4. Dividends and Taxes: SPY Has a Different Dividend Mechanism

Dividend distribution is another key distinction among these ETFs. Due to its unit trust structure, SPY does not automatically reinvest dividends, potentially making its dividend reinvestment less efficient than IVV and VOO. Additionally, SPY’s tax treatment can be somewhat more complex in certain cases, whereas the structure of IVV and VOO is more favorable for dividend reinvestment.

• SPY: Dividend distribution differs slightly from the other two ETFs.

• IVV and VOO: Suitable for automatic dividend reinvestment, helping to minimize tax costs associated with frequent trading.

For investors focused on long-term accumulation, IVV and VOO offer a dividend reinvestment advantage.

5. Summary: Choosing the Right S&P 500 ETF

In conclusion, SPY is suitable for short-term investors and frequent traders due to its high liquidity and active trading volume. Meanwhile, IVV and VOO, with their low fees and dividend reinvestment advantages, are more favorable for long-term holders. Over time, the low fees and efficient dividend reinvestment of IVV and VOO may provide greater compound returns for long-term investors.

For cost-conscious investors, VOO and IVV are the preferred choices, while SPY appeals to those with higher liquidity needs. Ultimately, investors should choose the ETF that best aligns with their investment horizon, cost sensitivity, and liquidity requirements.