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S&P 500 ETF Comparison: SPY vs VII vs VOO

S&P 500 index funds are a staple of index investment – providing exposure to the 500 biggest companies on the US stock exchange. By holding S&P 500 index funds, investors can greatly diversity their portfolios without incurring large transaction costs. But which S&P 500 EFT should you choose? Vanguard, SPDR and iShares all offer exchange traded funds which track the S&P, each with their own strengths and advantages.

The SPDR S&P 500 ETF (SPY) is managed by State Street. It is the oldest of the funds compared, launching onto the NYSE in 1993. The iShares Core S&P 500 ETF (IVV) was launched in 2000 by iShares – a brand of BlackRock. In 2010, the Vanguard S&P 500 ETF (VOO) hit the market, managed by Vanguard Investments.

When deciding which S&P 500 ETF is worthy of your investment dollars, there are a number of factors to consider:

Market Cap, Average Daily Volume

The market cap measures the size of the fund by the total value of all issued shares. The market cap is determined by multiplying the share price by the number of outstanding shares. The market cap will vary not only by movements in the price of the fund, but also if new units are created or redeemed by wholesale investors.

Average daily volume is the number of shares that are traded in an average day.  A high volume suggests a liquid market – one which is easy to trade in. If volume is low, less people are buying and selling the stock. If volume is high, there are more players in the market and buy/sell spreads are expected to be lower.

The table below outlines the market cap and average daily volume of each S&P 500 ETF:

S&P 500 ETF Market Cap / Average Daily Volume

iShares (IVV)
Vanguard (VOO)
Market CapUSD 146.72 BillionUSD 44.62 BillionUSD 10.7 Billion
Average Daily Volume129.3 Million4.1 Million1.4 Million

NAV Discount

Shares in an ETF will fluctuate in price over time as the value of the underlying investments of the fund change. The market cap of the fund will not match the net value of the assets held by the fund. All three S&P 500 ETFs compared currently enjoy a NAV discount – it is cheaper to buy units in the funds than to buy the individual stocks that make up the units. SPDR (SPYand iShares (VIIcurrently enjoy a discount of 0.1% – $1,000,000 of units can be broken down into $1,001,000 of shares of the underlying companies which make up the fund. Vanguard (VOO) currently trades at a net discount of 0.04%.

The NAV discount will constantly change as the price of the ETF or the underlying stocks move. Should a net discount become significant, wholesale investors may choose to purchase units and redeem them for the underlying stock. Alternatively, if the ETF is selling for a net premium (the underlying stocks are worth less than the fund units) they may opt to create new units. This process ensures that the ETF price fund does not stray too far from the net value of each unit. Creating and redeeming units are multi-million dollar deals, generally out of reach for retail investors. A retail investor can still take advantage of NAV discounts by purchasing ETF units when the discount is high, however the benefit is generally insignificant.

Expense Ratio

The expense ratio represents the overall operating costs of each fund. These costs include administration, management and all other expenses incurred. This fee is charged from earnings before distribution. A lower expense ratio is preferable – meaning less of your money ends up in the fund manager’s pocket.

SPDR (SPY) has the highest expense ratio of the ETFs compared –  0.09%. This means for every $1,000,000 of assets held by the fund, $900 of expenses will be withheld from returns. iShares (VII) has a slightly lower expense ratio of 0.07%, while Vanguard (VOOhas the lowest expense ratio of 0.05%.

The expense ratio of all three funds is well within the range expected for index ETFs. While Vanguard (VOOhave the advantage of a lower expense ratio, in reality this difference will be insignificant for the retail investor.

Tracking Error

Tracking error is a measure of how closely an ETF follows the benchmark index. The below table shows the annual returns (pre-fees) for each of the S&P 500 index funds compared to the index. Please note: as Vanguard (VOO) was listed on September 7, 2001 no prior data exists.

S&P 500 ETF Tracking Error 2002-2012

S&P 500 Index
iShares (IVV)
Vanguard (VOO)
Tracking Efficiency0.999950230.99999710.998490262

As shown above, all three of the ETFs track the index extremely closely. The difference in correlation (tracking efficiency) between funds is negligible and should not play a significant factor when choosing between these options.

Fund Structure

Each of the three funds has a different structure. SPDR (SPYis a unit investment trust. This structure prevents the use of derivatives or lending stock, instead focus must be on replicating the index ‘the old fashioned way’. Due to the unit trust structure, any dividends paid by the underlying companies cannot be automatically reinvested back into the fund and must instead be held as cash until the next quarterly fund distribution. iShares (VII) uses an open-ended structure that allows dividend to be reinvested straight way, as well as the use of derivatives and lending.

Vanguard (VOO) operates under yet another structure, allowing other Vanguard funds to be seen as part of one portfolio. This patented structure allows Vanguard to provide tax benefits through in-kind redemptions, reducing capital gains. When a non-ETF investor redeems units, Vanguard may trigger capital losses by selling ETF assets and replacing them with non-ETF assets. Like iShares, Vanguard may also use derivatives or lending to more efficiently track the index.

Which S&P 500 ETF is best?

Despite nearly identical performance, each of the S&P 500 ETF options has its own pros and cons. Significant benefit lies not in performance or fees, but in fund structure. The SPDR (SPYhas the best tracking efficiency and the longest track record, but has some limitations caused by it’s unit structure. iShares (VIIprovides a lower expense ratio and added flexibility. Vanguard (VOOoffers the lowest expense ratio and potentially some interesting tax efficiencies due to their unique structure. At the end of the day, different funds will be best suited to each investor. It always pays to do your own research before committing to any investment, and index ETFs are no different.

S&P 500 ETF Comparison

iShares (IVV)
Vanguard (VOO)
Market CapUSD 146.72 BillionUSD 44.62 BillionUSD 10.7 Billion
Average Daily Volume129.3 Million4.1 Million1.4 Million
NAV Discount0.1%0.1%0.04%
Expense Ratio0.09%0.07%0.05%
Tracking Efficiency0.99995023%0.9999971%0.998490262%

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  1. August 22, 2013

    Thanks for all the good information. It’s interesting how each ETF can vary slightly even though they are supposed to technically perform the same.

  2. September 20, 2013

    Great analysis. I have a majority of my money in SPY. It’s good to know that it basically is the same or better than the other comparison securities. Thanks for digging down into the details!


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