The S&P 500 (^GSPC +1.01%) index is a cornerstone of many investment portfolios, representing the performance of 500 leading publicly traded companies in the U.S. With its diverse coverage, the S&P 500 is a popular choice for investors seeking broad market exposure.
Exchange-traded funds (ETFs) can give investors exposure to a broad basket of stocks, all in a single stock-like ticker.
Where the convenience of ETFs intersects with the wide-ranging market exposure of the S&P 500, you'll find a handful of index-tracking ETFs that leave the stock-picking to the index manager and mirror its holdings as passively and automatically as possible.
Among the various S&P 500 ETFs available, the Vanguard S&P 500 ETF (VOO +1.00%) stands out as a top contender -- by the slimmest of margins, but why not insist on the best?
NYSEMKT: VOO
Key Data Points
Overview of the Vanguard S&P 500 ETF
The Vanguard S&P 500 ETF (I'll call it "the Vanguard ETF" hereafter) is designed to provide investors with exposure to the S&P 500 index at a low cost. Known for its superior expense ratio, the Vanguard ETF is a favorite among cost-conscious investors. The ETF aims to mirror the performance of the S&P 500 by holding a similar portfolio of stocks.
It is also a favorite asset of master investor Warren Buffett. The Berkshire Hathaway (BRK.A +0.43%) (BRK.B +0.40%) portfolios under his wing contain exactly two ETFs, and the Vanguard fund is one of them. That's a reassuring stamp of approval from one of the greatest investing minds in history.
Comparison with other S&P 500 ETFs
When considering S&P 500 ETFs, the SPDR S&P 500 ETF Trust (SPY +1.01%) and iShares Core S&P 500 ETF (IVV +1.01%) are reasonable alternatives to the Vanguard ETF (let's call them "the SPDR ETF" and "the iShares ETF," respectively). The iShares fund may sound like it targets something else, given the "core" portion of the fund name. Given its name, one might assume it follows a narrower list representing the core of the S&P 500. However, it tracks the same S&P 500 index as the other two names on this list -- the name simply refers to this list tracking the core of the American stock market.
Here's how the three ETFs compare.
The SPDR ETF boasts higher options volume, which might come in handy if you want to boost your returns with covered calls. It's not my cup of tea, but this could be a selling point for some ETF pickers.
On the other hand, the Vanguard and iShares ETFs come with lower expense ratios, making them more cost-effective in the long run. For investors who don't engage in options trading, the Vanguard and iShares ETFs' cost advantages are clear. And if you want the best of both worlds, the Vanguard ETF remains a highly liquid name in the options market.
Performance analysis
The Vanguard, SPDR, and iShares ETFs have consistently delivered performance in line with the S&P 500 index. Here's a look at their historical performance in terms of total returns:
|
Time Frame |
S&P 500 Total Return |
Vanguard ETF Total Return |
SPDR ETF Total Return |
iShares ETF Total Return |
|
1 Year |
28.6% |
28.6% |
28.5% |
28.6% |
|
3 Years |
33.7% |
33.6% |
33.5% |
33.7% |
|
5 Years |
103% |
102.8% |
102.4% |
102.8% |
|
10 Years |
241.3% |
240.3% |
238.5% |
240.3% |
Data collected from YCharts after the market close on 5/21/2024.
These ETFs all closely track the S&P 500 index, especially in the long run. Their performance is practically identical in any given time frame. Honestly, you can't really go wrong with any of them -- but you're reading this because you want to find the best option. The choice often comes down to three deciding factors:
- Expense ratios,
- Personal preferences regarding options trading, and
- Branding or name recognition.
That last point may sound irrelevant, but it holds more power than you might assume. For example, the Warren Buffett connection guides me toward the Vanguard option, though he also likes the SPDR fund. And Vanguard is the creation of index fund mastermind Jack Bogle -- another theoretical connection that weighed in the Vanguard ETF's favor.
Suitability for different types of investors
The Vanguard ETF and iShares ETF's low expense ratios and robust performance make them excellent choices for long-term investors focused on cost efficiency. Their liquidity ensures that they meet the needs of most investors, including those dabbling in options, albeit the SPDR ETF offers the highest options volume.
For investors seeking a straightforward, cost-effective way to invest in the S&P 500, the Vanguard ETF and iShares ETF stand out. Warren Buffett's Berkshire Hathaway holds both Vanguard ETF and SPY, underscoring the credibility and reliability of these ETFs. However, for those not engaged in options trading, the Vanguard and iShares ETFs' lower costs tilt the balance in their favor.
Why Vanguard wins in a photo finish
The Vanguard S&P 500 ETF and iShares Core S&P 500 ETF are all fantastic choices for investors who want to mirror the longtime returns of the S&P 500 market index. Their low expense ratios and strong performance make them ideal for most investors.
But the Vanguard ETF wins by the skin of its proverbial teeth in my eyes.
While the SPDR ETF is a worthy contender, particularly for options traders, the Vanguard and iShares alternatives offer a razor-thin cost advantage that makes them standout options, particularly for long-term investors. And if I ever start dabbling in options trades to boost my ETF returns, the Vanguard ETF gives me that option, too. You never know, right?
Whether you're a seasoned investor or just starting, the Vanguard, iShares, and SPDR versions of S&P 500 ETFs are all solid bets for broad market exposure. If you insist on the best, the Vanguard fund provides a Goldilocks combination of the lowest possible fees and mid-range suitability for options trades.
