If you want to invest in the S&P 500 (^GSPC 0.06%), two exchange-traded funds (ETFs) usually come to mind first: The Vanguard S&P 500 ETF (VOO 0.08%) and the SPDR S&P 500 ETF (SPY 0.03%).
At a glance, they look virtually identical. Both track the same index. They're both ultra-liquid and have very low fees. And, of course, both have delivered nearly identical long-term returns.
That means you need to look under the hood to see what differentiates one from the other. Small differences matter, and over time, those differences can make one ETF look better than the other.
Image source: Getty Images.
The differences between S&P 500 ETFs
There's no sense in discussing the composition of these two ETFs. The only thing to note is that the index is still heavily invested in tech stocks, including the "Magnificent Seven" group of Nvidia, Microsoft, Apple, Amazon, Alphabet, Meta Platforms, and Tesla.
NYSEMKT: SPY
Key Data Points
That means that the biggest difference is going to come down to cost. The total cost of ownership, which includes the expense ratio and any trading spreads, will likely determine which is the better ETF to own.
Another underappreciated distinction is the structure of the products. The Vanguard fund is a traditional open-ended ETF, while the SPDR ETF is structured as a unit investment trust (UIT). This matters because UITs have some limitations. They cannot immediately reinvest dividends, and they often keep small amounts of cash on hand. Over long periods, that can result in a slight performance drag for the SPDR S&P 500 ETF.
NYSEMKT: VOO
Key Data Points
But this SPDR fund also has a liquidity advantage. On an average day, it has about 9 times the dollar trading volume of the Vanguard ETF. That generally means lower trading spreads, something that can be advantageous for frequent traders.
Fees make the Vanguard S&P 500 ETF the better choice
The SPDR S&P 500 ETF has an expense ratio of 0.0945%. The Vanguard S&P 500 ETF charges just 0.03%.
That difference may not seem huge, but it is in the world of huge S&P 500 ETFs. Over years and decades, that slight difference compounds and can create a meaningful performance advantage over the long term.
For frequent traders, the SPDR S&P 500 ETF might still be the preferred choice. If you can save even a tiny bit of spread on every trade, that can accumulate and actually offset the expense ratio disadvantage. The more you trade, the more likely it is that this SPDR ETF will be the better choice.
For most long-term investors, however, the Vanguard S&P 500 ETF is the better S&P 500 ETF to buy. It delivers the same U.S. stock market exposure as the SPDR S&P 500 ETF, but does it with lower fees. That simple advantage means that investors keep more of their money in their own pockets over time.
