The S&P 500 Index is a large-cap U.S. diversified index that tracks the performance of 500 major firms that are listed on US stock exchanges. It includes companies from all eleven GICS sectors, and it covers around 24 different industry groupings.
The S&P 500 index is widely recognized as one of the most accurate indicators of the performance of major American stocks, and thus the stock market as a whole. In fact, the very first ETF, SPDR’s SPY, was benchmarked to the S&P 500 in 1993.
For investors looking to tap into and replicate the performance of the S&P 500 Index, ETFs are considered a simple, low-cost, highly liquid way to do so. When you invest in an ETF tracking this index, you immediately own top stocks like Disney, Apple, Tesla, and Amazon, and the index’s average annualized return has been about 10%.
S&P 500 funds are now available from nearly all major brokerage and investment firms, but how do they compare? While there are many top choices, the SPDR S&P 500 ETF Trust (SPY) and the iShares Core S&P 500 ETF (IVV) are two of the most popular ETFs that target the index. Here’s how the two iconic ETFs compare.
|Name||iShares Core S&P 500 ETF||SPDR S&P 500 ETF Trust|
|Issuer||Blackrock Financial Management||State Street|
Both the SPDR S&P 500 ETF Trust SPY and iShares Core S&P 500 ETF IVV aim to provide investment outcomes that are generally consistent with the price and yield performance of the S&P 500 Index before expenses.
The SPDR S&P 500 ETF Trust, commonly known as the SPY ETF, is a popular fund that seeks to fully replicate the S&P 500 index. It is widely recognized as the first ETF to be listed, and it is still one of the most popular. It’s worth noting that the SPY ETF has a very low relative tracking error because it fully mimics the index.
The iShares Core S&P 500 ETF IVV is one of the cheapest ways to get well-diversified, low-turnover, low-cost exposure to large-cap equities in the United States. The iShares ETF has a very low cost of 0.03 percent and is highly liquid. It also provides a higher dividend than its main competitors and has a low tracking error, making it the lowest fee/error ETF among its key competitors when combined with its low charge.
While the holdings breakdowns of SPY and IVV appear to be identical, with Microsoft MSFT, Apple AAPL and Amazon AMZN claiming the top three slots, there are a few key distinctions:
With an average daily volume of roughly 108.7 billion dollars and an expense ratio of 0.09%, SPY is the most commonly traded ETF. IVV, on the other hand, is less liquid, with an average daily volume of 6.2 billion, resulting in a small bid/ask spread that adds to the cost. That being said, IVV charges only 4 basis points in yearly fees, which is 55% less than the SPY.
However, the expense ratio is only one factor to consider. In actuality, your trading style will have a greater impact on which of these funds is best for you than the expense ratio alone.
On a daily basis, IVV trades around $1.5 billion worth of stock, whereas SPY trades over $25 billion. Why is there such a disparity? One factor to consider is reputation. Because SPY was the first ETF ever developed, it is often the first ticker that investors think of when they think of the S&P 500.
Furthermore, while it’s a small point, the “SP” element of the SPY ticker also helps the user to immediately relate the SPY to the S&P 500.
SPY is a Unit Investment Trust (UIT) with State Street as the trustee. As a result, dividends received by underlying holdings cannot be reinvested; instead, they must be held in cash until they are slated to be dispersed to SPY shareholders. On the other hand, the iShares ETF has no such restrictions and can lend out shares to generate additional income. IVV additionally reinvests dividends in the index until they are paid out quarterly, improving the fund’s gains.
Liquidity is another significant factor. Big institutions favor SPY as a trading vehicle because it is extremely liquid, simple to trade, and has one of the lowest trading costs in the market.
Although both the average trading spread and the average cost in absolute terms round down to 0% for both ETFs, there is a difference when looking at the average cost in absolute terms. SPY is $0.01 per share, whereas IVV is $0.02 per share. SPY is therefore a lower-cost option for large institutional traders and why it is preferred over IVV.
Growth of assets
Though IVV’s AUM of $168.5 billion is much lower than SPY’s $249 billion, it has expanded its asset base at a faster rate if we look at it from a historical perspective.
Ultimately, it does seem to be a nit-picking analysis between the two S&P 500 ETFs, but it does demonstrate how two seemingly comparable funds differ in a variety of ways.
Choosing one over the other all boils down to whether or not you’re a frequent trader. When trading costs are considered, the ETF with the higher expense ratio may actually make more sense than the cheaper ETF.
However, buying the ETF with the lower expense ratio makes more sense if you’re a long-term buy-and-hold investor. IVV is appealing to investors because of its cheap fee and dividend reinvestment option, but SPY is appealing because it is simple to acquire and sell large amounts of SPY without incurring additional costs.
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