Investors are not just looking to buy and sell stocks. They’re also keen on gaining the benefits that come with a broad portfolio, including diversification and tax advantages. The problem is, it’s difficult for investors to get access to those “dividend-like” payments without going through complicated processes. Enter exchange traded funds (ETFs). Two of the top five best performing ETFs in 2018 were from S&P 500 Indexes: SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA)and Vanguard Industrials Allocation Fund ISEQ IAUX ).
Covid vaccine review article 2021 is a comprehensive review of two S&P 500 ETFs. The article discusses the pros and cons of each ETF, as well as their strategy for investing in them.
VOO (Vanguard S&P 500 Index ETF) and SPY (SPDR S&P 500 Index ETF) are two of the most popular ETFs (exchange-traded funds) in the world. Each of these funds:
- Attempts to replicate the performance of the S&P 500 Index
- Because of its lower-than-average turnover, it is tax-efficient.
- Expense ratio is lower than actively managed mutual funds.
As a consequence, any of these stock ETFs is a terrific choice for long-term investors looking to reduce their portfolio’s expenses. Owning both ETFs, however, is likely to be unproductive since they essentially accomplish the same thing.
If an investor had to select the best S&P 500 index fund, it would have to be the one with the lowest expense ratio. As it currently stands, the better ETF would be VOO.
Fees aside, SPY & VOO are two of the best ETFs out there, with few minor differences.
Both funds will be thoroughly examined in this paper. We’ll go through the following aspects of each fund:
- Investing priority
- Performance in comparison
- Investment holdings & size
- Fees, turnover & tax impact in an investment portfolio
We’ll also discuss where ordinary investors may buy these ETFs.
Let’s begin by discussing the Investing priority of these ETFs
Both VOO and SPY are index funds whose investment objective is to track the Standard & Poor’s 500 Index. Both VOO and SPY purchase individual stocks from the S&P 500 Index in relatively equal proportions.
VOO and SPY focus on replicating the S&P 500, not outperforming it. This leads us to wonder what exactly is the S&P 500 Index?
What is the S&P 500 Index?
The S&P 500 is one of the world’s oldest stock indices, and arguably one of the most famous. Created by Standard and Poor’s (now known as S&P Global) in 1957, the S&P 500 Index represents the 500 largest publicly traded U.S. companies.
As of the quarter ending 3/31/2022, the S&P 500 Index had 505 U.S. companies representing approximately $40.3 trillion in Capitalization of the market.
VOO owned individual stocks in 507 publicly listed U.S. firms as of February 28, 2022. As of March 31, 2022, SPY has 505 individual equities in its fund.
Why is the S&P 500 so popular?
There are probably three reasons why the S&P 500 Index is one of the world’s most popular indices.
1. It is situated in the United States.
The stock market in the United States is the biggest in the world. The stock market in the United States is really made up of multiple exchanges, including:
- The New York Stock Exchange (NYSE)
- New York Stock Exchange
- Additional stock exchanges
All of these exchanges provide the greatest number of investment choices to the greatest number of investors. Everyone may invest in the stock market in the United States.
From options traders to institutions and active traders looking to perform big block trades, to retail investors–there’s a place in the U.S. stock market for everyone. And the S&P 500 is arguably the most popular index of them all. Since it’s one of the oldest.
2. The S&P 500 is one of the oldest indices
According to Investopedia, there are approximately 5,000 different indexes in the United States. The three most popular indices are the S&P 500, Dow Jones Industrial Average (the Dow), and the NASDAQ 100.
The S&P 500 isn’t the oldest index in the United States. That distinction belongs to the Dow. The Dow was created in 1896, and is the United States’ second oldest continuous index (next to the Dow’s Transportation Index).
However, the S&P 500 was created in 1957, which still makes it substantially older than most of the other indexes that exist. Additionally, it’s a little more diversified than the Dow.
3. It has a wider range of stocks than the Dow Jones Industrial Average.
There are two noticeable differences between the Dow and the S&P 500.
The S&P 500 has more companies
The Dow Jones Industrial Average includes 30 of America’s major corporations. They are not, however, among the top 30 corporations. Dow components (as these firms are sometimes known) are large-cap U.S. equities that provide a solid indicator of the economy in the United States.
The Dow changes along with the business sector. Dow components have begun to represent the largest firms in the health care and technology sectors in recent years. Years may pass without the Dow’s component firms changing.
Conversely, the S&P 500 Index is strictly comprised of the 500 largest companies in the US stock market, by Capitalization of the market. Every year, the S&P 500 is updated as different companies fall in value, and others take their place.
The S&P 500 companies comprise almost 90% of the total Capitalization of the market of the entire U.S. equity market.
Weighting by index
The Dow Jones Industrial Average is a price-weighted indicator. This implies that the amount you see on the stock ticker is the sum of the prices of the 30 businesses in the index, multiplied by a factor (known as the Dow divisor). Different company activities, such as spinoffs and dividend payments, are represented by this adjustment factor.
Because the index is weighted by stock price, the ‘largest’ firm in the index is the one with the highest stock price. United Health Group now ‘weighs’ more than Apple, despite the fact that Apple is 5 times bigger (by Capitalization of the market).
Furthermore, the smallest business in the Dow may change the average just as much as the biggest on any given day. If the stock price of Walgreens rises by a dollar and the stock price of United Health Group falls by a dollar, the price changes cancel each other out.
Conversely, the S&P 500 is a market cap-weighted index. This means that each company is represented in the index in proportion to their total size. For example, Apple, the largest company in the S&P 500, is larger than the bottom 180 stocks in the index combined.
We’ll see how the S&P 500 holdings look, and how VOO and SPY stack up next to them.
The holdings of each of these funds are virtually identical. Let’s take a closer look at the top ten holdings in the S&P 500, followed by each ETF.
S&P 500 Top Ten Holdings
Tech companies dominate the S&P 500 top ten. In fact, only Berkshire Hathaway and United Health Group really stand out as non-tech companies.
S&P 500 Top ten investments
The top 10 components represent approximately 28.5% of the overall S&P 500 Index. Let’s see how VOO compares.
The Top Ten Holdings of VOO
Like the S&P 500, tech companies dominate the top ten in VOO. As of 2/28/2022, VOO’s top ten comprised about 29.5% of the overall fund. This makes it fairly similar to its underlying index.
The Top Ten Holdings of VOO as of 02/28/2022 (Vanguard website)
Top Ten Holdings in SPY
Like VOO, tech companies dominate the top ten in VOO. As of 04/13/2022, SPY’s top ten comprised about 28.5% of the overall fund. Here is a side by side comparison of SPY and the S&P 500 index.
SPY Top Ten Holdings compared to S&P 500
These are almost similar, as you can see. And consistent with VOO’s. VOO and SPY are compared side by side below.
|Fund||Top ten investments||The remaining number of businesses||Companies that remain ( percent )|
A comparison of the largest holdings of VOO and SPY as a proportion of total net assets.
Let’s take a look at the Total Holdings, by sector, of the S&P 500 Index. Since both SPY and VOO track the S&P 500, each fund’s holdings is represented by a pie chart from its respective index, to make it easier to visualize.
Breakdown of the S&P 500 companies, by sector
In the S&P 500, the tech sector reigns supreme (28% of holdings), followed by health care (13.6%), consumer discretionary goods (12%), and financials (11%).
Overall, a decent representation of America’s 500 largest corporations.
Value vs. growth stocks
Each fund is a passive index fund. As a result, neither fund tries to achieve a slant towards growth or value. But since the S&P 500 is a market-cap weighted index, you might find that these funds tilt slightly more towards large-cap growth rather than value stocks.
Capitalization of the market
It’s easy to generalize the S&P 500 as an index that focuses only on large-cap U.S. stocks. It does, by definition, contain all of the publicly traded large-cap U.S. stocks. However, it contains some mid-cap size stocks as well.
According to Investopedia, mid-cap stocks are those with between $2 billion and $10 billion in Capitalization of the market. As of January 2022, approximately 20-25 companies fit that criteria, with another 20 that are between $10 billion and $12 billion.
So generally, the S&P 500 has about 5% of its total companies (perhaps as much as 10%, depending on a stock market correction), that are mid-cap companies. Since it’s a market cap weighted index, virtually any movement of these companies is nullified by the fortunes of Apple, Tesla, and the rest of the top ten.
Let’s take a look at the overall assets managed (AUM).
Comparison of AUM
Vanguard index funds are among the most well-known in the world. Whether you’re talking about mutual funds or ETFs, their cheap costs make them very appealing to novice investors.
State Street Global Advisors, the company that administers SPY, isn’t as well-known as Vanguard. It is, nevertheless, equally familiar to institutional investors. SPY was founded in January 1993, making it the first ETF in the United States (and one of the oldest ETFs in the world).
As they both track the S&P 500 Index, SPU and VOO are two of the largest ETFs offered by two of the largest ETF issuers in the world.
VOO weighs in at $808 billion under management. However, this includes Vanguard’s flagship S&P 500 mutual fund, VTSAX.
VOO manages around $286.6 billion, according to ETF Database, which keeps track of the top 100 ETFs by assets under management. By volume, it is the world’s fourth biggest ETF.
In comparison, SPY manages about $410.1 billion. This makes it the world’s largest ETF, just ahead of iShares Core S&P 500 Index (IVV), at $331.3 billion.
Let’s look at the performance of each fund, both compared to its benchmark index and in absolute terms.
Comparison of results
Before we dive in, both SPY and VOO are passive index funds. Their goal is to track the performance of the S&P 500 Index. There isn’t much difference between the funds and the index
But these funds’ returns will always underperform the index based on two factors: management fees & taxes.
Ratios of expenses
Also known as management fees, Ratios of expenses are taken from the investment to cover the operating costs of the fund. Usually, Ratios of expenses are reflected by an adjustment to the end of day share price.
An index fund has the benefit of not having to pay for an active fund manager, investment analysts, or other employees to oversee the investments. Low fees make index funds a suitable alternative for many investors when it comes to passive investing.
VOO has a 0.03 percent expenditure ratio. Vanguard will take $3 per year for every $10,000 invested. In contrast, most financial advisers consider a fund to be reasonably priced if its cost ratio is less than 1% per year.
The expenditure ratio for SPY is 0.09 percent. State Street takes $9 per year for every $10,000 invested.
Many investors may be surprised to learn that SPY costs three times as much as Vanguard. Over the course of ten years, the difference in a $1 million portfolio may amount to $6,000.
That seems to be a reasonable sum of money. However, there are two points to consider:
Capital gains aren’t always worth the change.
Make the transition to a lower-cost Roth IRA or 401k plan if you have these assets in a Roth IRA or 401k plan. However, if SPY has been a primary holding in your taxable account for a long period, the capital gains taxes are unlikely to be worthwhile.
You’ll obtain identical results right now without having to worry about taxes. Both funds are also less expensive than other options.
Both funds are much less expensive than similar choices.
While $6,000 isn’t pocket change, each fund is far less costly than a fund charging 1% over the same period (which might cost $100,000 in a million-dollar portfolio).
Portfolio turnover, which causes tax drag, is another element to consider.
Mutual funds and ETFs also engage in taxable events, such as harvesting capital gains or collecting dividends from underlying firms.
Because neither State Street nor Vanguard pay taxes on these occurrences, it’s difficult to see how taxes affect yearly returns. The investor is informed about these transactions.
These occurrences have no bearing on tax-deferred accounts.
It’s difficult to observe in most investing accounts. You’ll see quarterly dividend transactions for each mutual fund or ETF in your investment portfolio every quarter.
A low payment is likely if your fund has a low percentage of dividend-paying companies. These dividends, however, will be taxed in taxable investment accounts.
This might be qualified dividends (which are taxed at capital gains rates), ordinary dividends (which are taxed at regular income tax rates), or a mix of both.
Distributions of capital gains
And at the end of the year, normally towards the end of December, you’ll see Distributions of capital gains in each of your funds. The amount of distributions depends on the amount of activity in your fund.
If your fund has high turnover, you’ll likely be subject to a lot of Distributions of capital gains. High turnover means an active fund manager is consistently buying and selling the underlying securities within the fund. Those capital gains are required to be passed on to the investor.
Index funds, on the other hand, see very little turnover. Each of these indicators is recalculated every year. The funds are also rebalanced on a quarterly basis. As a result, there isn’t much buying and selling going on. As a result, your performance will be less affected.
Taxes have no effect on the performance of your investment. However, tax efficiency should be taken into account when evaluating your total investment success.
Let’s take a look at the Performance in comparison of each fund (minus management fees), compared to its underlying index.
VOO vs. SPY vs. S&P 500 Index
Here’s how VOO’s yearly investment performance has changed during the last year, three years, five years, and throughout its history:
- 15.59 percent after one year
- 18.88 percent after three years
- 15.95 percent after 5 years
- 14.60 percent on a ten-year basis
- 15.33 percent since inception
Similarly, VOO’s performance slightly trails the S&P 500 Index, with Ratios of expenses presenting the only difference.
Annual performance of VOO and the S&P 500 Index (Vanguard website)
In comparison, Here’s how VOO’s yearly investment performance has changed during the last year, three years, five years, and throughout its history:
- 15.52 percent after one year
- 18.76 percent after three years
- 15.83 percent during the next five years
- 14.49 percent during the next ten years
- 10.37 percent since inception (inception was in 1993, vs. 2010 for VOO)
SPY’s investment performance vs.the S&P 500 since inception
Since both VOO and SPY are ETFs, it’s important to note that Vanguard also offers VFIAX, a mutual fund that tracks the S&P 500 Index.
Volume of trade
Sometimes, an investment is risky to an investor who cannot quickly liquidate it. A key indicator of the ability to quickly sell an investment is Volume of trade, as measured in average daily volume.
Liquidity is not a problem since VOO and SPY are three of the world’s biggest ETFs. SPY has traded at a volume of roughly 94.6 million shares per day over the past 30 days as of 4/13/2022. VOO, on the other hand, had an average daily volume of 5.34 million shares.
Finally, without mentioning some of the benefits of ETFs over mutual funds, this review would be inadequate.
ETFs have a number of advantages over mutual funds.
Despite their similarities, ETFs and mutual funds have numerous major distinctions.
Minimum financial commitment
According to Vanguard, there is a $3,000 Minimum financial commitment to invest in VFIAX. There are usually no Minimum financial commitments to purchase an ETF. However, an investor has to be able to purchase a complete share.
M1 Finance is one of the smaller brokerage businesses that offers fractional ownership in ETFs. However, the majority of them do not.
ETFs and mutual funds are both commonly accessible investment options.
Mutual funds, on the other hand, are more commonly accessible to investors who do not have brokerage accounts since they are provided in employer-sponsored retirement plans (such as 401k or 403b plans).
Execution of trades
During the trading day, however, ETFs are more commonly accessible. ETFs are exchanged in the same way that equities are.
On the other hand, mutual fund trades do not get processed until the end of the trading day. This can have an impact on pricing and Execution of trades, particularly during stock market volatility.
This isn’t a problem the overwhelming majority of the time. However, trade was so erratic during the coronavirus pandemic that stock exchanges shut down many times in March and April 2020. There were also numerous days with large dips.
For a long-term investor, Execution of trades should not matter.
Costs of transactions
Many online brokerages have eliminated or charged minimal transaction costs for ETFs. Brokerages, on the other hand, often impose transaction fees for mutual funds that are not issued by the brokerage.
Vanguard, for example, will handle any Vanguard mutual fund transaction for free. For each Vanguard mutual fund transaction, however, Schwab imposes a $49 transaction fee. However, trading SPY or VOO with Schwab is free.
Where You Can Purchase VOO & SPY
You can purchase VOO & SPY through almost any online brokerage firm or through your financial advisor. If you’re looking for more diversification, you should consider a wider stock market investment, such as the Vanguard Total Stock Market Index ETF (VTI).
The “covid-19 vaccine: a comprehensive status report” is a review of two S&P 500 ETFs. The article discusses the pros and cons of each fund, as well as how they compare to other funds in the market.
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