First, let’s get the definitions out of the way: The SPDR S&P 500 Trust (SPY) and the Vanguard S&P 500 (VOO) are both exchange traded funds, or ETFs. An ETF is an index fund that issues shares that you can buy and sell over a stock exchange, just like shares of an individual stock.
Both SPY and VOO are designed to replicate the performance of the S&P 500 index of large cap stocks. The S&P 500 is a collection of the 500 biggest U.S. companies traded on the New York Stock Exchange, weighted by market capitalization.
The Role of ETFs in General
ETFs are useful because they enable ordinary investors to gain instant diversification across hundreds of different stocks with a single transaction — at an extremely low cost. Typically, ETF expense ratios range from as low as 0.03% to 0.1% for most commonly-traded indexes.
Exchange-traded funds are very popular among indexers and fans of passive management. Many studies have shown that trying to pick individual stocks is a fool’s errand for most: In most years, a solid majority of professional mutual fund managers fail to beat the investment returns of a closely-related unmanaged index by at least the amount of their costs. Furthermore, studies also show that the mutual fund managers who do beat the index in any given year cannot be reliably identified in advance.
Because they both track the exact same index of large-cap U.S. stocks, both SPY and VOO will have almost exactly the same portfolio at any given time. There will be no significant differences in their sector weightings, dividend yield, price to earnings ratios, or any of their holdings.
There may be some minor portfolio differences in the few days after Standard & Poor’s announces a change in the Index makeup. When companies fall out of the top 500 biggest market capitalizations in the country, and new stocks are promoted to the S&P 500 as they grow in value, one fund may be quicker to sell the old companies and buy the new ones. But these changes normally occur to the smaller end of the S&P 500, where each individual stock has only a tiny impact on the weighting.
Many ETF investors are attracted to them specifically because of their extremely low costs. If rock-bottom expenses are what you are looking for, then the Vanguard S&P 500 ETF is totally your bag, baby!
The Vanguard Group prides itself on keeping costs extremely low. As Vanguard’s flagship ETF, VOO clocks in at a razor-thin 0.03% expense ratio every year. In comparison, SPY’s expense ratio is three times higher, at 0.09% per year.
That’s not a huge deal in any given year. It’s a difference of just $6 per year for every $10,000 invested. If you invest $100,000, the difference is $60 per year.
But as we shall see, VOO’s cost advantage is cumulative. That is, the small advantage adds up and becomes more significant year over year.
Theoretically, one would expect VOO to have a slight advantage over SPY simply due to its cost. You would also expect the difference to become more pronounced with longer holding periods. And you’d be correct! Matthew Chin of towardsdatascience.com did a comparative analysis of VOO and SPY price changes over a ten-year time period.
His findings: That the performance of the two ETFs were virtually indistinguishable from one another on a day-to-day basis. Their differences were minor with a year-long holding period, but VOO outperformed SPY for the vast majority of rolling one-year periods.
The tiny cost advantage that VOO has, however, continues to compound over longer periods of time: Over a one-year period, VOO defeats SPY by a median margin of 0.0871 percent. Over five years, VOO’s edge increases to 0.7158 percent. according to Chin’s data.
Over the entire 10-year period Chin measured, VOO increased 236.5 percent, compared to SPY’s 234.1 percent. So VOO’s total 10-year cost advantage comes out to 2.4 percent over a decade.
SPY vs VOO - Which #ETF is better?
While VOO has a small but significant cost advantage over long periods of time, SPY has an important advantage, too: Volume. Institutions are much more likely to trade SPY shares than VOO shares. Institutions are attracted to SPY’s lower trading costs. It costs institutions about a penny per share to trade a SPY share.
For VOO, the net trading cost is about two pennies per share. Thanks to that trading cost advantage, SPY boasts a much higher average daily trading volume: At $25 billion per day, SPY’s typical daily volume dwarfs its Vanguard competitor’s $1.5 billion.
This advantage doesn’t show up in Chin’s numbers, which are spread out over the various holding periods Chin studied. Chin is measuring carrying costs, not trading costs, where SPY has the advantage.
But when volatility rears its head, an ordinary investor may be better off in SPY. The reason: If you’re trying to sell off ahead of a big market decline, or you want to buy to take advantage of an opportunity, and an institution has the same thought at the same time, you could get swamped:
A single big institution buying or selling off its VOO shares could move markets against you just when you’re trying to make a trade. Your trade may be executed last, after the institutional transaction is complete. Which means you may not get the most favorable pricing when it counts.
Where the daily volume is $25 billion, rather than $1.5 billion, a single institutional trade is less likely to roil the markets against you. The market can much more easily absorb the volume.
This is a bigger consideration for big traders, however, rather than dollar-cost averagers and people just selling off enough shares to generate retirement income. If you’re just buying or selling a little bit at a time, SPY’s liquidity and trading volume advantage won’t amount to much.
If you’re among the small minority of readers who manage or trade institutional money, then you might prefer SPY.
SPY vs VOO - Which is better?
All things being equal, the slight edge for most retail investors goes to the Vanguard Group’s offering, VOO. Vanguard’s rock-bottom expense ratio is tough to beat. Vanguard’s 0.06 percent cost advantage is tiny. But the advantage accumulates inexorably over time. Over the course of an investing career, the difference can add up to thousands of dollars.
However, if you’re an active trader, and you expect to make big moves, buying and selling a significant percentage of your holdings, or you manage a large institutional account, SPY might be the better choice for you.
While both SPY and VOO have their advantages for a certain kind of investor, don’t overreact by selling off shares of one for a tiny advantage in owning the other. That could expose you to capital gains taxes on any profits – easily wiping out any of the slim advantages you thought you would gain by switching.
Use SPY and VOO for Tax Loss Harvesting
If you happen to have significant losses in one of these ETFs — after a big market decline, for example — you could harvest those losses by selling off your shares in one and buying the other.
For example, sell off your losing position in VOO and use the proceeds to buy SPY shares, or vice versa. This may allow you to reduce your tax bill by offsetting capital gains elsewhere in your portfolio – and up to $3,000 in income that year. Furthermore, if selling generates more than $3,000 in losses, you can roll the excess losses to offset capital gains in future years, and up to $3,000 of income in each year, until you’ve used up all your losses.
You can’t buy back shares in the same ETF within a month. Otherwise the capital loss would be disallowed under “wash sale” rules. You can’t sell a security, buy the same thing the next day, and still take a tax deduction for a capital loss. You have to wait at least a month before you buy back the same or a “substantially identical security.”
But since VOO and SPY are different ETFs, with different investment companies and different expenses, etc., they are not “substantially identical.” They’ll both serve the same role in your portfolio: Broad, low-cost exposure to the U.S. stock market.
So if stocks fall during your holding period, you can sell shares in one – realizing a capital loss, and immediately replace your holdings with the other S&P 500 ETF — a strategy called tax loss harvesting. The result will be a lower net tax exposure in the future.
A qualified tax advisor can help you determine when to sell and how much to sell for the optimum tax loss harvesting benefit.