For most long-term investors focused on passive index investing, VOO is generally considered the better option when comparing it to SPY. While both exchange-traded funds (ETFs) track the performance of the S&P 500 index, key differences in their expense ratios and recent performance metrics favor VOO for cost-effective, long-term growth.
Understanding SPY and VOO
Both SPY (SPDR S&P 500 ETF Trust) and VOO (Vanguard S&P 500 ETF) offer investors a way to gain exposure to the 500 largest U.S. companies, as represented by the S&P 500 index. Their primary goal is to mirror the index's performance. However, subtle yet significant differences in their structure and investor appeal differentiate them.
Key Differences: SPY vs. VOO
When evaluating which ETF is better to buy, several factors come into play, including costs, performance, and investor flows.
Comparative Overview
| Feature | SPY | VOO |
|---|---|---|
| Total Expense Ratio (TER) | 0.0945% | 0.03% |
| Year-to-Date (YTD) Performance | 28.31% | 28.36% |
| YTD Flows | +$7.13 Billion | +$103.99 Billion |
Expense Ratio (TER)
One of the most crucial factors for long-term investing is the expense ratio, which is the annual fee charged by the fund. A lower expense ratio means more of your investment returns stay in your pocket over time.
- VOO boasts a significantly lower Total Expense Ratio (TER) of 0.03%.
- SPY's TER is 0.0945%, which is more than three times higher than VOO's.
Over decades, even small differences in expense ratios can compound into substantial amounts, making VOO a more cost-efficient choice for investors.
Performance and Investor Flows
While both ETFs aim to track the same index, slight variations in tracking efficiency and investor sentiment can lead to minor performance differences.
- VOO has shown a slightly better Year-to-Date (YTD) performance of 28.36%.
- SPY's YTD performance stands at 28.31%.
Although the performance difference is minimal, VOO also demonstrates stronger investor confidence through its significant inflows.
- VOO has attracted substantial YTD flows of +$103.99 billion.
- SPY's YTD flows are comparatively much lower at +$7.13 billion.
These vastly different flow figures suggest that a much larger volume of new capital is currently being directed towards VOO, indicating its strong preference among investors for long-term holdings.
Which One to Choose?
The choice between SPY and VOO often boils down to an investor's specific strategy and priorities:
- For Long-Term Buy-and-Hold Investors: VOO is generally the superior choice due to its lower expense ratio and slightly better performance. The compounding effect of lower fees over many years can lead to significantly higher returns. Its strong inflows also indicate its popularity for foundational portfolio building.
- For Active Traders and Options Strategies: SPY, being the older and more established ETF, typically has higher trading volume and is widely used for options trading and short-term maneuvers by institutional investors and day traders. Its higher liquidity can be an advantage for those who need to enter and exit positions frequently. However, for average retail investors holding for the long term, this aspect is less relevant.
In summary, if your goal is to invest in the S&P 500 for long-term growth with minimal fees, VOO is demonstrably the better option.
