SPY’s ongoing dominance in the equities class may be attributed to its first-mover status. As the saying goes, volume begets volume, and SPDR’s S&P 500 ETF continues to attract hefty flows. With about an average 88.4 million daily volume, SPY trades more than any other security, has the most liquid options market of any ETF and provides tight bid-ask spreads.
The SPDR S&P 500 ETF is the most heavily traded security in the world. The high level of liquidity makes it very inexpensive to execute big orders, which is an attractive feature for large traders and institutions with relatively short anticipated holding periods. Moreover, 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.
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.
On the other hand, the IVV and VOO 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.
Furthermore, IVV is the cheapest among the group with a 0.04% expense ratio and VOO also comes with a dirt cheap 0.05% expense ratio, compared to SPY’s 0.10% fee. Both the Vanguard and iShares options have also been quickly gaining traction as an alternative, low-cost method for accessing the S&P 500, notably IVV which recently crossed into the $100 billion club. Investors would probably utilize the two options as a buy-and-hold investments since holding fees have a bigger impact on returns than short-term trading costs.
For more information on the markets and U.S. Stock ETFs, visit our S&P 500 category.