Exchange traded fund investors have a number of ways to track the S&P 500 Index, but each option shows small differences that can produce different results.
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For starters, the SPDR S&P 500 ETF (NYSEArca: SPY) is the largest ETF and the first U.S.-listed ETF to hit the market. With about 111.6 billion shares exchanging hands on average each day, SPY trades more than any other security, has the most liquid options market of any ETF and tight bid-ask spreads.
“SPY is the most heavily traded security in the world. This level of liquidity makes it very inexpensive to trade in large amounts, which is an attractive feature for traders and institutions with relatively short anticipated holding periods,” Ben Johnson, director of global ETF research for Morningstar, said in a research note.
Due to its robust liquidity, SPY is typically used by institutional investors as a substitute for S&P 500 futures contracts.
However, potential investor should be aware that SPY is structured as a unit investment trust and not a regulated investment company like other funds. Consequently, the structure prevents SPY from reinvesting dividends, holding securities that are not included in the index, like futures, or engaging in securities lending. Moreover, the ETF has a one-month lag between the ex-dividend date and the payment of its dividends.
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Due to these restrictions, SPY may have an inferior long-term track record with its underlying S&P 500 benchmark relative to other similar ETFs. SPY has lagged behind its benchmark index by more than its expense ratio, and the divergence is more prominent during bull markets. SPY has generated an average annualized return of 15.46% over the past five years while the S&P 500 returned 15.60%. The ETF comes with a 0.09% expense ratio.
On the other hand, the Vanguard 500 Index (NYSEArca: VOO) and 17.93 from iShares Core S&P 500 ETF (NYSEArca: IVV) are structured as a Regulated Investment Company, which allow the ETFs to reinvest dividends, engage in securities lending and utilize index futures – activities that may help an ETF lower estimated holdings or diminish the divergence between long-term performance and the underlying S&P 500.
Over the past five years, VOO has shown an average annualized return of 15.56% while IVV had a 15.52% return.
VOO also comes with a cheaper 0.05% expense ratio and IVV has a 0.07% expense ratio. Both the Vanguard and iShares options have also been quickly gaining traction as an alternative, low-cost method for accessing the S&P 500. Investors would probably utilize the two options as a buy-and-hold investments since holding fees have a bigger impact on returns than trading costs.
Consequently, large and fast traders would probably prefer SPY while long-term investors would stick to cheaper VOO or IVV.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
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