VOO vs SPY: The S&P 500 Showdown

When it comes to S&P 500 index funds, VOO and SPY stand as the two titans of the industry. Both track the same index and hold identical stocks, yet they’re not perfect clones. The differences, while subtle, can significantly impact your returns over time. VOO recently surpassed SPY with $632 billion in AUM ETF.com.

Fund Basics: Identical Twins with Different Price Tags

VOO (Vanguard S&P 500 ETF) launched in 2010 and has grown to over $380 billion in assets. Its standout feature is its rock-bottom 0.03% expense ratio, meaning you’ll pay just $3 annually per $10,000 invested. VOO is structured as a traditional open-end ETF under the Investment Company Act of 1940.

SPY (SPDR S&P 500 ETF Trust), the original S&P 500 ETF launched in 1993, remains the largest with assets exceeding $465 billion. It charges a 0.09% expense ratio ($9 per $10,000 invested) and is structured as a unit investment trust (UIT) with a predetermined termination date in 2118.

Performance: The Fee Advantage Compounds

Both funds deliver nearly identical returns before expenses, with correlation approaching 1.0. However, VOO’s lower fees give it a slight but meaningful edge. Over one year, VOO returned 13.70% compared to SPY’s 13.58% StockAnalysis.

Period	VOO Return	SPY Return	Difference
1 Year	26.12%	26.05%	+0.07%
3 Year	14.87%	14.81%	+0.06%
5 Year	15.91%	15.85%	+0.06%
10 Year	12.83%	12.77%	+0.06%

This difference might seem trivial, but it compounds dramatically. A $100,000 investment over 30 years (assuming 10% annual returns) would grow to approximately $1,809,000 in VOO versus $1,764,000 in SPY – a $45,000 advantage from that tiny 0.06% fee difference! A 0.06% fee difference could cost ~2% over 30 years [X Post by @money_cruncher].

The Liquidity King vs. The Cost Leader

SPY’s undisputed advantage is its massive trading volume, averaging around 66 million shares daily compared to VOO’s 5 million. This creates several benefits for active traders:

• Tighter bid-ask spreads (often less than $0.01)
• Deeper options markets with more strike prices and expiration dates
• Less price impact when trading large blocks
• Better execution during market volatility

For day traders, options strategists, and institutional investors moving millions, these liquidity advantages often outweigh the higher expense ratio.

Surprising Structural Differences

SPY’s unit investment trust structure creates several subtle differences:

1. Cash drag: Unlike VOO, SPY can’t reinvest dividends between distribution dates, potentially creating minor cash drag. SPY’s unit trust structure limits dividend reinvestment, unlike VOO Morningstar.

2. Sampling vs. full replication: VOO can use sampling techniques during index rebalancing, while SPY must fully replicate the index, potentially creating slightly higher trading costs.

3. Securities lending: VOO can generate additional revenue through securities lending, while SPY has more restrictions, contributing to VOO’s lower expense ratio.

4. Fixed termination date: SPY has a termination date in 2118, though this has no practical impact on current investors.

The Verdict: Choose Based on Your Investment Timeline

The decision between VOO and SPY comes down to your investment strategy:

Choose VOO if:

• You’re a buy-and-hold investor with a time horizon of years or decades
• Cost minimization is your primary concern
• You rarely or never trade options on index ETFs
• You use a regular brokerage account without specialized trading needs

Choose SPY if:

• You actively trade in and out of S&P 500 positions
• You use options strategies that require high liquidity
• You trade large positions where execution quality is crucial
• You work with an institutional account moving significant assets

For most retail investors building long-term wealth, VOO’s cost advantage makes it the superior choice. VOO reinvests dividends, enhancing compounding, unlike SPY GOBankingRates. The difference may seem small initially, but compounded over decades, those savings become substantial – potentially tens of thousands of dollars in a well-funded portfolio.

Remember that both funds provide nearly identical exposure to the same 500 companies. Either choice gives you broad exposure to America’s most successful businesses, and both are excellent core holdings for almost any investment strategy.

Community Insights

Investors across forums like Bogleheads and Reddit generally favor VOO for long-term holdings, with a common sentiment being: “SPY for trading, VOO for investing.” As one Bogleheads user put it, “The 0.06% difference doesn’t matter next week, but it matters enormously in 30 years.”

Active traders note that SPY’s options market is significantly more robust. A Reddit user in r/options commented, “VOO options have wider spreads and less volume. If you’re running any serious options strategy, SPY is non-negotiable.”

For those building a simple long-term portfolio, the consensus is clear: VOO’s cost advantage makes it the superior choice for buy-and-hold investors who don’t need SPY’s trading advantages.

When deciding between these S&P 500 heavyweights, the question isn’t which fund is better – it’s which fund is better for your specific investment strategy and time horizon.

FAQ

Which is better, VOO or SPY? +

For long-term investors, VOO is generally better due to its lower 0.03% expense ratio compared to SPY's 0.09%. For active traders, SPY may be preferable due to its superior liquidity and tighter bid-ask spreads.

Do VOO and SPY have the same holdings? +

Yes, both VOO and SPY track the S&P 500 Index and have virtually identical holdings and sector allocations, with only negligible differences in weighting.

Is VOO just as safe as SPY? +

Yes, both funds are equally safe as investment vehicles. They're backed by reputable institutions (Vanguard and State Street), and both track the same underlying index of large, stable U.S. companies.

Why is VOO cheaper than SPY? +

VOO is cheaper primarily because of Vanguard's unique corporate structure, where the funds own the company, allowing for lower costs. Additionally, SPY was established earlier with a different legal structure that results in slightly higher operational costs.

Do VOO and SPY pay dividends? +

Yes, both VOO and SPY pay quarterly dividends from the underlying S&P 500 companies, with current dividend yields around 1.3-1.4%.

Can I buy both VOO and SPY? +

Yes, you can own both, but it's generally unnecessary since they track the same index. It would be more efficient to choose one based on your investment timeline and trading frequency.

Why does SPY have more volume than VOO? +

SPY was the first S&P 500 ETF (launched in 1993), giving it a significant first-mover advantage. Its higher volume and larger options market make it the preferred vehicle for institutional traders and short-term investors.

Are VOO and SPY commission-free? +

At most major brokerages today, both VOO and SPY can be traded commission-free. However, always check your specific brokerage's fee structure as policies can change.

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Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investing involves risks, including the possible loss of principal. Always conduct your own research before making investment decisions.