Anyone holding the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) owns a piece of history: the first US-listed ETF, launched in 1993, and today the world’s largest fund at roughly $676 billion in assets. SPY is the default S&P 500 vehicle because it is deep, liquid, and options-rich. What most SPY holders do not realize is that State Street, the very issuer of SPY, sells a second S&P 500 ETF that tracks the same 500 names at a fraction of the fee. For a long-term index investor, that gap is worth examining before another dividend arrives.
Why SPY Still Earns Its Place
Core infrastructure for U.S. equity markets is what SPY has become. The fund offers the tightest bid-ask spreads of any ETF, the deepest options chain, and enough daily volume to absorb institutional-sized trades without moving the price. Its top holdings mirror the index precisely, with NVIDIA at 7.58%, Apple at 6.66%, and Microsoft at 4.91% as of March 2026. Over the past decade, the fund has returned 252.47% on a price basis before dividends. For traders, hedgers, and anyone writing covered calls, the ecosystem around SPY is genuinely hard to replicate.
The Fee Gap Buried in the Fine Print
The expense ratio for SPY is 0.0945%. State Street’s own SPDR Portfolio S&P 500 ETF (NYSEARCA:SPYM) charges 0.02%. That is roughly 4.7 times cheaper for the same index, from the same manager, holding the same stocks in the same weights. SPYM’s top holdings are effectively identical: NVIDIA at 7.57%, Apple at 6.66%, Microsoft at 4.91%. On a $100,000 position, the annual fee runs about $94.50 in SPY versus $20 in SPYM. Over 20 years of compounding, that spread accumulates into a meaningful amount.
The Structural Wrinkle Most Holders Miss
Fees are only half the story. SPY is organized as a unit investment trust, a 1993-era structure that legally cannot reinvest dividends inside the fund. When a portfolio company pays a dividend, SPY holds the cash until the next quarterly distribution. In a rising market, that idle cash creates a small but persistent drag. SPY paid $7.52 per share in trailing 12-month dividends on a $771.89 share price, so the cash-drag effect scales with the payout.
A 1940 Act open-end fund is what SPYM is, which means its manager can reinvest interim dividends immediately and use in-kind creation and redemption more flexibly for tax efficiency. Neither structure is exotic, though the open-end format is what nearly every modern index ETF uses, and it is one reason SPYM’s total return has run slightly ahead of SPY’s over multi-year windows even before accounting for the fee difference.
What the Trader Loses by Switching
Real tradeoffs do come with SPYM. The options market is thinner than SPY’s, so anyone running collars, spreads, or covered calls may find SPY more suitable. Bid-ask spreads on SPYM are wider in dollar terms, though the fund still trades tens of millions of shares daily and holds $157.49 billion in assets. For a buy-and-hold investor placing market or limit orders once a quarter, that spread difference is trivial. For a day trader moving size, it is not.
Making the Switch Without a Tax Surprise
Inside an IRA or 401(k), the swap is mechanical: sell SPY, buy SPYM, done. In a taxable account, selling SPY can trigger capital gains on years of appreciation, and the fee savings would take a long time to recoup a large tax bill. A common approach is to leave existing SPY lots alone, redirect new contributions and reinvested dividends into SPYM, and revisit any specific tax-loss harvesting opportunities that arise. SPYM’s quarterly ex-dividend cadence matches SPY’s, so income timing does not change.
Where That Leaves the Decision
The pricing conventions of an earlier era are simply what SPY reflects. Traders who rely on its options market or need the liquidity it provides have every reason to keep holding it. Long-term index investors who own SPY in tax-advantaged accounts, however, have less to defend. A fund from the same issuer, tracking the same 500 companies at roughly one-fifth the fee, with a structure that reinvests dividends internally, is worth weighing against personal tax and trading needs before the next contribution goes in.
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