Having an ETF that tracks the top 500 companies in the U.S. can prove to be a great tool for you should you look for a way to diversify your portfolio. Here at TurboWallet, we like ETFs and index funds, especially those that track the S&P 500 index. The Vanguard offering VOO and the State Street Global Advisors’ SPY are two. Therefore we want to look at VOO vs. SPY.
If you’re new to investing, you may ask yourself why you want to diversify your portfolio. The simple reason is this: Diversification or spreading your investments across different industries, vehicles, and other categories mean that you don’t have all your eggs in one basket. This means that you are mitigating the risks of investing.
If 100% of your portfolio is invested into one product, you may see your portfolio decrease in value if the company tanks. Now, if you’re only investing a small portion of your portfolio into that one company, you are less affected. This is why having a diverse portfolio is so important. Any individual fluctuations will affect you less and compensate your other investments.
This is why funds that track a certain index are a great way to achieve this diversification. Given that they track a diverse sector of the financial markets, they give you access to that spread in one tool. Although putting all your money into a single index may not be the best idea, they are a great start.
The S&P 500
One of these indexes that have gained interest and popularity is the Standard and Poor’s 500 or simply the S&P 500. The S&P 500 is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. The fact is that it is not a perfect list of the top 500 U.S. companies by market cap.
The index does take other factors into account. That being said, it remains one of the most well-trusted and used indexes in the industry today. It’s a great tool to track and consider how large-cap U.S. markets have been doing as a whole.
While it is a great tool, the S&P 500 does have some limitations. For one, when stocks in the index inflate in value and become overvalued. In this case, if a stock has a high representation in the index, the index will reflect that overvaluation. As such, the overvalued stock will inflate the total price of the index.
Given the prominence of the S&P 500, naturally, it will have its copycats. One such competitor is the Vanguard 500 Index Fund. This index fund looks to track the price and yield performance of the S&P 500 by investing in largely the same stocks and the same proportion. This means that the Vanguard 500 barely deviates from the returns seen with the S&P.
When comparing VOO vs. SPY, you compare two ETFs that track the same index. This means that we need to get into how these are built to see the differences. What is best for you is essentially seeing how small differences make significant changes over time.
What is SPY?
So now that we’ve seen this let’s look at our first ETF. If you think it looks familiar, you’ll be happy to know that we’ve covered it in our SPY vs. SPYG.
SPY is one of the many S&P 500 variation index ETFs known as the SPDR or “Spider” ETFs. These are ETFs managed by State Street Global Advisors and have been built to track different variations of the S&P 500. Other such indexes are:
- SPDR S&P 500 ETF Trust (SPY): The ETF covered in this article. It tracks the S&P 500.
- SPDR Portfolio S&P 500 Growth ETF (SPYG): The ETF looks to track and provide returns corresponding to the S&P 500 companies with the highest growth.
- SPDR Portfolio S&P 500 High Dividend ETF (SPYD): The Spider index looks to provide returns corresponding to the S&P 500 High Dividend-yielding companies.
- SPDR Portfolio S&P 500 Value ETF (SPYV): This Spider Index looks to provide returns corresponding to the total performance of the S&P 500 companies with the highest value.
- SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX): The Spider index for the climate-conscious of us. It provides returns corresponding to the subset of the S&P 500 that are “fossil fuel-free”.
All that said, SPY is one of the most popular investment products today. This can be seen by the fact that the same has over $422 billion in assets under management. This is due to many factors, for one, the small expense ratio of 0.0945%.
On top of that, the same does also provide dividends. That being said, these are not the important part of any ETF. When investing in an index fund like SPY, you mainly look at how the same grows in value. All that being said, SPY has an annual fund distribution yield of 1.21%.
Who manages the SPDR ETFs?
Spider ETFs are quite a popular investment option, and they are a great investment tool should you look for one. That being said, who manages them? State Street Global Advisors (SSGA) is the investment management sector of State Street Corporation.
The SSGA created this division in 1978 in Boston, Massachusetts. 15 years later, in 1993, the firm introduced the SPY S&P 500 ETF we’re looking at today.
SSGA has served the world’s governments, institutions, and financial advisors for over four decades. The firm is proud of its rigorous and risk-aware approach that constructs research, analysis, and many years in the markets.
This approach has made the company the world’s fourth-largest asset manager. With over $3.90 trillion being shepherded, they have grown to be leaders in index and ETF investing.
What Does SPY Hold?
Now let’s get into the gritty details of SPY. How does the same track keep up with the S&P 500? Now, the index holds a total of 506 stocks. Of these, the top ten as of December 2021 with their corresponding weights are:
|Apple Inc: 6.85%||Microsoft Corporation: 6.24%|
|Amazon.com Inc: 3.78%||Alphabet Inc. Class A: 2.19%|
|Alphabet Inc. Class C: 2.05%||Meta Platforms Inc. Class A: 2.01%|
|Tesla Inc: 1.94%||NVIDIA Corporation: 1.85%|
|Berkshire Hathaway Inc. Class B: 1.36%||JPMorgan Chase & Co: 1.17%|
As expected from the fund that tracks the S&P 500, we see the usual suspects. As you’d expect, we have the big tech companies at the top of the list, spearheaded by Apple and Microsoft. These 500 companies are distributed in different sectors as:
|Information Technology: 29.21%||Health Care: 13.25%|
|Consumer Discretionary: 12.44%||Financials: 10.80%|
|Communication Services: 10.34%||Industrials: 7.72%|
|Consumer Staples: 5.84%||Real Estate: 2.72%|
|Energy: 2.69%||Materials: 2.52%|
As we would expect, a third of the fund is in the Technology sector. This is in great part because these have become massively important in the U.S. in recent years.
What is VOO?
So now, let’s look at the second contender of our VOO vs. SPY article. What is VOO? This is the Vanguard equivalent ETF to SPY. The same does track the same S&P 500 and provides investors with returns corresponding to the same.
There are a few minor differences to it, for one, the expense ratio. Vanguard is well known for its minuscule expense ratios. This is seen here, as VOO has ratios as low as 0.03%. This is less than one-third of what is offered by SPY. When looking at a game of inches, this does have an impact.
This is also seen in their slightly higher dividend yield at 1.30%. This is partly due to the lower expense ratio charged by the firm. All that being said, we have to reiterate that you wouldn’t be investing in these ETFs for the dividends. Both these funds are simply capital gains and total return vehicles.
Who manages the VOO ETF?
Now let’s look at the firm behind VOO. Who is the Vanguard Group? John C. Bogle first founded this fund as a fund division of the Wellington Management Company in 1975. Although he retired from Vanguard in 1999, the firm is one of the most important investment firms. With over $7.50 trillion in assets, they are second only to BlackRock, Inc.
The aspect that sets Vanguard apart is its structure. The company shows pride in that they are owned by its funds, which the shareholders own. This means that the firm only has to cater to its shareholders.
It allows Vanguard to charge very low expenses for its funds. When talking about ETFs, we’re already talking about low fees. Vanguard brings this to a new level.
Vanguard shows immense pride in its stability, low costs, and risk management. They are leaders in passively managed assets, these being mutual funds and ETFs.
What Does VOO Hold?
Having looked at all this, let’s see what VOO holds to match the S&P 500. With $827.2 billion in assets, the same are distributed in 512 different stocks. When looking at which companies these are held, we see the following:
|Apple Inc. (AAPL): 6.64%||Microsoft Corp.(MSFT): 6.36%|
|Amazon.com Inc.(AMZN): 3.91%||Tesla Inc.(TSLA): 2.38%|
|Alphabet Inc. Class A(GOOGL): 2.19%||NVIDIA Corp.(NVDA): 2.08%|
|Alphabet Inc. Class C(GOOG): 2.05%||Facebook Inc. Class A(FB): 1.98%|
|Berkshire Hathaway Inc. Class B(BRK.B): 1.31%||JPMorgan Chase & Co.(JPM): 1.21%|
These 10 holdings make up 31.4% of the total fund. Now, when looking at sector distribution, the same fall as follows:
|Communication Services: 10.40%||Consumer Discretionary: 13.20%|
|Consumer Staples: 5.60%||Energy: 2.70%|
|Financials: 10.80%||Health Care: 12.70%|
|Industrials: 7.80%||Information Technology: 29.40%|
|Materials: 2.50%||Real Estate: 2.60%|
SPY vs. VOO
Now we compare SPY vs. VOO, and there are just tiny differences. Firstly, in how they are distributed, however, changes are minuscule. Both have tracked the S&P 500 very faithfully, remaining within 0.05% of returns compared to the S&P 500 in the past year.
Where more significant differences appear is in the expense ratios of the same. Given that VOO charges fees as low as 0.03%, these can come back into your pocket.
Small changes can affect decisions when considering a multi-year period and investing in significant funds. For some, a change between 0.03% and 0.09% may be minuscule, but it will have an impact over the long haul. In this case, VOO has SPY beat.
Lastly, the big change is the management firm. The firm you are more comfortable with may impact what side you would want to place your bets on. Both indexes are sufficiently liquid for you to be able to trust that they will remain running for a long time.
Final Thoughts on VOO & SPY
All in all, both funds are functionally identical, so there is no significant difference in which you would rather invest. The slightly lower expense ratios and the corporate structure of Vanguard may have you lean that way.
The fact that both VOO and SPY are quite similar means that if you invest in one, you won’t be investing in the other. Both are great tools to invest in the U.S. markets and spread risks when investing. Whichever you go for, you’ll be in great hands.
Remember, the most important aspect of investing is doing research beforehand. Whichever decision you make, you need to be sure it is the best way to go. If you remain unconvinced or would like to know about other ETFs or mutual funds, make sure to check our investing section!
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