Exchange-traded funds reached global assets under management of $11.5 trillion in 2023, a 25% year-over-year increase. While ETFs can be built to track the price of gold, bonds, or even bitcoin, stock ETFs still make up most of the market.
While there are ETFs that track the whole stock markets of many countries, including the U.S., a popular strategy is to zoom in on the S&P 500, an index of the 500 largest companies in America.
Those companies represent the leading players in many industries, and most are high-quality businesses with well-established brands.
Two of the most popular ETF options are the Vanguard S&P 500 ETF (NYSEARCA: VOO) and SPDR S&P 500 ETF Trust (NYSEARCA: SPY). Both funds have been solid investments over the past year, with VOO up 25.01% and SPY up 25.46%.
Similar returns might be expected from the two exchange-traded funds given that they track the same index, but there are still subtle differences between VOO and SPY. That includes the funds’ compositions, valuations, expense ratios, and even dividend yields.
For example, VOO offers an automatic dividend reinvestment plan which is best for long-term investors looking to compound their returns. By contrast, SPY pays out dividends in cash and does not offer a DRIP. That’s because SPY is structured as a Unit Investment Trust, so it’s got various limitations including being unable to reinvest dividends.
So which ETF is best: VOO or SPY?
Is SPY A Good ETF?
State Street Advisors founded SPY in 1993, and it was the first ETF ever listed in the U.S.
Even though the fund was built to track 500 companies, they aren’t equally weighted in the index or the ETF. In fact, a third of SPY’s assets are distributed among its top 10 stocks.
As a result, SPY is heavily weighted toward mega-cap companies, and the tech industry as a whole. Topping the list is the world’s largest company, Microsoft, which makes up 7% of the fund’s $536 billion portfolio. Next is Apple, which is 5.6% of SPY. NVIDIA, Amazon, and Meta round out the ETF’s top five holdings.
Almost 30% of SPY is composed of technology stocks. Its next highest concentration is financials, including top 10 holding Berkshire Hathaway, which makes up 13.2% of the fund. Healthcare is the next largest sector in SPY, and Eli Lilly makes up 1.4% of the fund’s portfolio.
SPY is passively managed, like all ETFs, so its stock composition constantly shifts along with the S&P 500. For example, as artificial intelligence anticipation has driven up stocks like Nvidia and Broadcom, those stocks received higher weighting in the index.
There are downsides to such a heavy tech concentration, however. The S&P 500 performed poorly when technology stocks slumped in 2022, though it rallied back quickly after AI enthusiasm fueled a new rally. SPY is currently up 86.6% in the past five years.
Savvy investors who bought the ETF after its 1993 launch, however, would be up 1,148.3%, not including dividends.
Is VOO ETF A Good Investment?
Vanguard launched VOO in 2010, but the fund has skyrocketed in popularity, and now has assets under management of $1.1 trillion. Aside from that, VOO shares many of the same characteristics as SPY.
Microsoft is VOO’s top holding with 7.1% of its portfolio. Then comes Apple, with 5.6% of the fund. After NVIDIA and Amazon, however, Google parent company Alphabet rounds out the ETF’s top five.
VOO shares the same technology-centric composition as SPY, because information technology stocks make up 29.6% of the ETF’s portfolio.
VOO has slightly underperformed SPY over the past five years with an 85.8% return.
VOO Vs SPY Returns
Even though SPY has performed slightly better in the long run, VOO edged out SPY this year.
VOO is up 16.19% year-to-date compared to SPY’s 16.05% return. VOO is slightly cheaper, trading at $504 per share while SPY trades at nearly $550 per share.
VOO has a price-to-earnings ratio of 26.1x compared to SPY’s P/E of 21.96, which might indicate that SPY is still trading at a more substantial discount. That is backed up by the fact that SPY has a price-to-book multiple of 4.45x compared to VOO’s price-to-book ratio of 4.5x.
One of the most important features of ETFs is they still pass on dividends to their shareholders. SPY currently has an annual dividend yield of 1.39%, while VOO has a 1.36% annual dividend yield.
The dividend payout fluctuates each quarter, but the last payout for VOO was $1.54 per share, compared to SPY’s most recent quarterly dividend of $1.59 per share.
Expense Ratios For VOO And SPY?
Even though exchange-traded funds are passively managed, both Vanguard and State Street charge fees to ETF holders. However, those fees are not directly charged to investors, they are taken out of the investment’s value over time.
VOO has an expense ratio of 0.03%, meaning a $10,000 investment in the ETF held for one year would cost an investor just $3. SPY has a slightly higher-than-average 0.09% expense ratio, meaning just $9 is charged for every $10,000 invested.
According to Vanguard, the average expense ratio of similar funds is 0.78%.
VOO vs SPY Holdings
It’s worth noting that both VOO and SPY use market-cap weightings, so with technology stocks dominating both ride the coattails of the artificial intelligence boom.
The top holdings for both are:
What Is The Best ETF: VOO Or SPY?
Investing in S&P 500 index funds is a tried-and-true method for multiple reasons. First, S&P 500 companies represent the key industries in the U.S. economy, and the large-cap businesses are generally stable and profitable. That profitability often leads them to reward their shareholders with dividends.
The S&P 500 has a high concentration in technology, which has been at the forefront of innovation with AI and cloud computing services. That could be a downside if there is an artificial intelligence bubble that bursts as some have predicted.
For long-term holders, however, both VOO and SPY have been winners. If the ETFs’ dividends are reinvested, both VOO and SPY are largely set-it-and-forget-it investments that can anchor a retirement portfolio.
SPY may be a bit more undervalued, even if it is a bit more per share. SPY also has a marginally higher dividend yield, and it has performed better long term. Ultimately, it’s up to investors whether those factors outweigh the ETF’s higher expense ratio.
Finally, a note for active traders that spreads are typically narrower on SPY given its longevity lends to more trading volume and tighter bid-ask spreads. For investors this won’t make much of a difference however.
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