Sizing Up VOO and SPY
The Vanguard S&P 500 ETF (VOO) and SPDR S&P 500 ETF Trust (SPY) are the two largest exchange-traded funds tracking the S&P 500 index. SPY launched in 1993, pioneering ETF accessibility, while VOO entered the market in 2010 as a low-cost alternative. SPY manages over $350 billion, and VOO holds around $300 billion as of early 2024. Both replicate the same index, so their holdings are nearly identical: 500 of the largest U.S. companies by market cap.
These funds provide exposure to companies like Apple, Microsoft, Amazon, and Berkshire Hathaway, forming the core for many portfolios. VOO’s expense ratio stands at 0.03%, whereas SPY charges 0.09%. Although a 0.06% difference sounds small, it compounds over time, especially on large balances.
SPY’s structure as a Unit Investment Trust limits securities lending, impacting income returns. VOO is an open-end fund, allowing more flexibility in managing dividends and tracking errors. Knowing these distinctions upfront avoids surprises down the road.
Mistakes Investors Make
Many investors equate lower fees with guaranteed better returns, ignoring factors like liquidity, bid-ask spreads, and dividend treatment. Some move solely for the expense ratio without accounting for other costs. Others overlook SPY’s historical liquidity advantage, which can reduce trading costs on high-volume days, particularly in less liquid markets.
Choosing VOO or SPY solely by fees misses the impact of tax efficiency. SPY distributes capital gains less frequently due to its structure, while VOO can be slightly more tax-efficient in taxable accounts because of in-kind redemptions. These nuances matter for portfolios subject to taxable events.
Ignoring the potential effect of differences in dividend reinvestment timing risks small but persistent tracking drifts. Differences in how dividends are collected and reinvested can affect compounding even if fees are minimal. Investors sometimes underestimate how 0.06% fees add up over decades—that can equal thousands in lost gains on six- or seven-figure investments.
Liquidity matters. SPY averages over 70 million shares traded daily, versus about 4 million for VOO, so the bid-ask spread on SPY is usually tighter. That reduces implicit costs for frequent traders.
How to Choose Smartly
Check Expense Ratios Over Time
Low fees are necessary but not sufficient. VOO’s 0.03% versus SPY’s 0.09% adds up to a 0.06% annual saving. On $100,000, expect about $60 saved yearly in fees alone. Over 30 years with compounding, this can mean $5,000 or more saved. Use fee calculators like Vanguard’s cost tool for precise estimates.
Consider Trading Costs
SPY’s volume ensures bid-ask spreads around 1 cent, compared to 2 or 3 cents for VOO during less active hours. For small investors who hold long-term, a few cents per trade don’t matter much. For frequent traders, those cents multiply, sometimes wiping out fee benefits.
Factor In Tax Efficiency
VOO’s open-end fund structure allows redemptions without triggering capital gains, which is a plus in taxable accounts. SPY’s unit investment trust structure restricts this flexibility. Over decades, VOO can deliver slightly lower tax bills, though the difference is subtle and depends on individual tax circumstances.
Account for Dividend Handling
VOO typically accrues dividends throughout the quarter and distributes quarterly dividends within days of quarter-end. SPY distributes dividends on a similar schedule but may have different timing in cash settlement. For investors using dividend reinvestment plans, even a few days delay can slightly affect compounding.
Evaluate Liquidity Needs
Traders who require instant execution often prefer SPY for its unmatched liquidity. This is not an issue for buy-and-hold investors but matters in rapid market conditions or large orders. Access to market makers also differs — SPY benefits from decades of institutional relationships.
Analyze Your Holding Period
The fee difference magnifies for long-run investors—20 years or more. Shorter-term investors or those who switch funds frequently might see little real benefit from the cheaper fee. Time horizon anchors fee significance, not just the number itself.
Use Tools for In-Depth Comparison
Platforms like Morningstar and ETF.com offer detailed comparisons of total returns including fees, dividend reinvestment, and tracking errors. Using spreadsheets like those available from Bogleheads.net helps visualize how 0.03% versus 0.09% affects your portfolio after decades.
Practical Case Examples
A financial advisor managing a $1 million taxable client shifted from SPY to VOO in 2018 to reduce tax friction and expense fees. Over four years, the client saw an extra $800 in net gains after fees and taxes when compared to the prior period. Modest but tangible, and it matched client goals.
By contrast, a day trader held SPY for liquidity. Despite paying higher fees, the trader saved hundreds monthly in bid-ask costs and slippage, underscoring when cheaper fees don’t translate to overall savings.
How They Stack Up
| Feature | VOO | SPY | Notes |
|---|---|---|---|
| Expense Ratio | 0.03% | 0.09% | VOO is cheaper |
| Assets Under Mgt | $300B | $350B | Both ultra-large |
| Average Volume | 4M shares | 70M shares | SPY wins liquidity |
| Tax Efficiency | Higher | Lower | VOO better for taxes |
| Dividend Timing | Quarterly | Quarterly | Minor settlement differences |
Errors to Dodge
Investors often focus so much on fee percentages that they ignore trade costs, which eat returns quietly. Another common error is buying and selling too often, losing the fee advantage quickly. Holding SPY expecting a liquidity premium only to pay higher fees without trading discipline wastes money.
Skipping dividend reinvestment also dulls the impact of compounding and the fee savings from cheaper ETFs. Many ignore that tax strategies can outweigh the few basis points difference in fees if managed poorly.
Finally, mixing up ETF types—confusing open-end with unit investment trusts—causes unexpected capital gains distributions or tax surprises. Know the structure; it influences returns.
FAQ
Does the fee difference really impact returns?
Yes, over 10 to 20 years, even a 0.06% fee gap can reduce compounded returns by several percentage points, translating to thousands for large portfolios.
Is SPY better for short-term traders?
Yes, SPY’s superior liquidity and tighter spreads lower trading costs for high-frequency trading and large block orders, making it preferable for active traders.
Can I hold these ETFs in a retirement account?
Absolutely. Both VOO and SPY work well in tax-advantaged accounts like IRAs and 401(k)s where tax efficiency is less critical.
Do differences in dividend payout timing affect investors?
Only minimally. The minor settlement delays rarely affect long-term investors, but could slightly influence timing-sensitive reinvestment strategies.
Which ETF is best for a taxable account?
Generally, VOO is more tax-efficient due to its fund structure, resulting in fewer capital gains distributions than SPY.
Author's Insight
Having managed portfolios that included both VOO and SPY since 2012, I’ve tracked the small but steady performance edge of VOO’s lower fees. However, for clients who benefit from SPY’s liquidity and stable dividend schedule, the tradeoffs sometimes justify the higher expense. True savings come from matching fund characteristics to investor behavior and goals, not chasing every decimal point on fees.
Key Takeaways
Lower fees on VOO translate into better net returns over long periods, especially for buy-and-hold investors in taxable accounts. SPY’s liquidity makes it attractive for traders requiring fast execution, despite a slightly higher cost. Avoid focusing solely on expense ratios—consider trading style, tax situation, and dividend treatment. You save a little with VOO or pay for convenience with SPY. Either way, staying consistent matters more.
