The S&P 500 includes some of the biggest stocks in the U.S. market. Source: Rian Castillo, Flickr.

Many investors believe that passive investment strategies involving tracking popular stock indexes are the best way to ensure strong long-term returns with minimal costs. Many exchange-traded funds that passive investors use tend to follow the S&P 500 (^GSPC -0.39%) as a benchmark, tracking their performance against the venerable index and seeking to match the market's overall gains.

Still, there are a surprisingly large number of S&P-tracking ETFs out there. With so many to choose from, what's the best way to find the right one for you? Let's take a closer look at some of the more popular S&P 500 ETFs to highlight their similarities and differences.

Source: SPDR.

The big 3 among S&P 500 ETFs
When it comes to ETFs tracking the S&P 500, the one that has been around the longest and has the most assets under management is the SPDR S&P 500 (SPY -0.36%), also known as the Spiders. As the first widely used ETF, the Spiders represent the biggest exchange-traded fund in the ETF universe, with 918 million outstanding shares representing $194 billion in assets. It's also the most actively traded S&P 500 ETF, with average daily volume of about 132 million shares. The fund has a gross expense ratio of about 0.11%, but the fund's manager has agreed to waive part of its management fee, leading to net expenses of just 0.0945%. That means you'll pay just $9.45 for every $10,000 you invest in the Spiders, which is a far cry from the $100 or more that some actively managed funds charge. Shares have a price that is just less than 10% of the value of the S&P 500 index.

As big as the Spiders are, though, they're not your only choice for an S&P 500 ETF. The iShares S&P 500 ETF (IVV -0.34%) has an even lower expense ratio of 0.07%, and with 331 million shares outstanding, the iShares ETF has about $70 billion in assets under management. Its price is relatively close to the Spiders, as it also was set up to reflect about 10% of the index's value. It isn't as actively traded as the Spiders, though, with just 5 million shares in average daily volume.

Finally, the Vanguard S&P 500 ETF (VOO -0.33%) represents the third major S&P 500-tracking ETF. Its price isn't tied to a fixed fraction of the S&P 500 index, and its daily volume of about 2.1 million shares makes it the least liquid of the three. The ETF has only $28 billion in assets, but its expense ratio of 0.05% is the lowest of the three major S&P 500 ETFs.

Look at total cost
It's tempting to assume that because all three of these ETFs track the same index, you should simply pick the cheapest one. But to do so, you have to go beyond expense ratio to incorporate total costs.


Trading costs can weigh on results. Source; TheTaxHaven, Flickr.

ETF investors have to deal with two sets of costs beyond expense ratios. First, whenever you buy or sell ETF shares, you have to deal with the bid-ask spread, or the difference that market makers set between what they'll pay you if you want to sell and what you have to pay them to buy. The SPDR ETF tends to have the narrowest bid-ask spreads and greatest liquidity, but all three ETFs feature reasonably small spread amounts. Bear in mind, though, that paying even an extra penny per share can equate to a full year's worth of expenses for some ETFs.

Also, some brokers offer their own proprietary S&P 500 ETFs at no commission, or have partnerships with third-party providers for commission-free trades. Currently, those with Vanguard accounts can trade the Vanguard S&P 500 ETF at no commission, while Fidelity offers access to the iShares S&P 500 ETF.

Keep your eyes open
In the end, which S&P 500 ETF you choose isn't likely to make a huge difference. Still, if you understand the subtle differences among various ETFs, you'll be better able to make an informed choice regardless of whether you're looking at index-tracking funds or other types of ETFs.