For millions of investors, buying the Vanguard S&P 500 ETF (VOO) has become the default way of “owning the market.” This is reinforced by the fact that VOO’s assets under management have just recently passed the $1 trillion mark.
With an expense ratio of just 0.03%, the Vanguard ETF is viewed as an affordable primary holding in any well-diversified portfolio. However, despite VOO’s popularity, it is not actually the cheapest way to invest in the S&P 500.
The State Street SPDR Portfolio S&P 500 ETF (SPYM) tracks the same benchmark while also charging an expense ratio of 0.02%. While the difference of 1 basis point is admittedly insignificant, it does raise a valid question. That being, if investors can essentially get the same portfolio for less, why do so many continue to choose VOO?
Nearly Identical Investment Portfolios
At their core, both VOO and SPYM maintain the same stated objective of tracking the performance of the S&P 500 index. That means investing in either fund provides exposure to the same underlying index of 500 of the largest US publicly traded companies. Such names include Apple (AAPL), Microsoft (MSFT), Nvidia (NVDA), Amazon (AMZN), and Meta (META), just to name a few. Sector breakdown, top holdings, and long-term performance remain all but identical given that both ETFs track the same underlying S&P 500 index.
For long-term investors, annual returns typically differ by just a few hundredths of a percentage point.
Every Basis Point Matters
The main distinction between the two funds is cost.
VOO charges an annual expense ratio of 0.03%, while SPYM charges an annual expense ratio of 0.02%. To put this into dollar terms, based on a $10,000 investment, that works out to roughly one additional dollar in annual fees.
Understandably, an extra dollar is not something most investors are going to lose sleep over.
Saving consistently, remaining invested during market drawdowns, and maintaining a disciplined long-term approach will have a far greater impact on generating long-term wealth as compared to penny-pinching over a one basis point fee difference.
However, it is important to acknowledge that fees compound just like investment returns. While it may seem trivial, choosing funds with lower-cost fee structures when practical can modestly improve long-term investor performance, without requiring additional risk-taking.
Why VOO Still Attracts the Most Capital
So, if SPYM offers nearly identical exposure at only a slightly lower cost, then why does VOO continue to draw more attention from investors?
The answer is largely based on reputation. Over five decades, Vanguard has established itself not only on the legacy of its founder John Bogle, but also its continued commitment to low-cost index investing. As such, the investment style has become synonymous with the brand. For individuals looking to passively invest in the S&P 500, VOO is automatically the first choice.
There is nothing inherently wrong with that. VOO remains an outstanding fund. But for investors willing to look past simple popularity, other low-cost options are available (i.e., SPYM).
Should Investors Make the Switch?
For most investors, the answer to the above question is probably not.
For those that already own VOO, particularly in a taxable brokerage account, selling to save a mere 1 basis point is unlikely to make financial sense. Potential taxes and transaction costs easily outweigh any benefit of future savings in this regard.
However, for investors just beginning to build a portfolio, it is worth considering alternative lower-cost passive S&P 500 ETFs like SPYM.
Funds like SPYM, VOO, and others all provide nearly identical market exposure, allowing investors to choose based on costs, liquidity, and the fund issuer they feel most comfortable with.
Does Most Well Known Equal Best?
VOO has rightfully earned its reputation as one of the leading long-term passive investment vehicles based on the issuer’s decades of commitment to low-cost index investing. However, its dominance can also serve as a reminder that prudent investors should not automatically assume that the most well-known fund is automatically the best in every situation.
SPYM may not draw the same attention (or capital, for that matter) but offers virtually identical exposure to the US stock market at a slightly lower cost. For investors looking to move beyond the crowd and do their own due diligence, the small fee differential reinforces a timeless investing principle. That is, before you buy, it is always worth comparing your options.
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