S&P 500, Broad Market ETFs On The Cheap

Accessing the S&P 500 via exchange traded funds is not difficult. Three ETFs –- the SPDR S&P 500 ETF SPY, the Vanguard S&P 500 ETF VOO and the iShares Core S&P 500 ETF IVV –- offer exposure to the traditional version of the benchmark U.S. index.

Although the aforementioned ETFs all track the same index, there are differences among the trio that long-term investors need to consider. For example, SPY, the world's largest ETF, is structured as a unit investment trust. That means investors that are considering holding SPY for extended periods cannot reinvest the dividends paid by the fund.

“This creates a cash drag when prices are rising. SPY is also not allowed to engage in securities lending--a technique many funds use to generate extra income that can be used to defray the cost of replicating an index,” according to Morningstar.

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SPY is also the most expensive of the three S&P 500 ETFs mentioned here with an annual expense ratio of 0.0945 percent, or less than $9.50 per $10,000 invested. IVV and VOO charge 0.07 percent and 0.05 percent per year, respectively. Knowing that, it is not surprising that VOO offers a modest performance advantage over longer holding periods. For example, VOO is up 45.2 percent over the past three years, a tenth of a percentage point ahead of IVV and four basis points ahead of SPY.

That is not to say SPY is bereft of advantages. As Morningstar notes, it is the most liquid S&P 500 ETF and home to the most robust options market among S&P 500 tracking funds.

IVV and VOO “are set up as regulated investment companies, a more flexible legal structure that allows reinvesting dividends and securities lending. While iShares' IVV is a stand-alone exchange-traded fund, Vanguard's VOO is a separate share class of a mutual fund. VOO also has the lowest expense ratio of the three, and this has given it a slight performance edge since its inception,” according to Morningstar.

Cheaper Options

Penny-pinching investors can take heart because there are broad market ETFs that are even less expensive, in terms of annual fees, than VOO. For example, the Schwab U.S. Broad Market ETF SCHB charges just 0.04 percent per year, or a mere $4 per $10,000 invested.

SCHB has some other advantages over VOO and the S&P 500 ETFs. The Schwab offering is home to more than 2,000 stocks, providing a deeper bench than S&P 500 funds. Additionally, Schwab clients can trade SCHB commission-free, further reducing their investment costs. Vanguard clients have commission-free access to VOO while Fidelity clients can trade IVV sans commission.

The Schwab U.S. Large-Cap ETF SCHX is also slightly less expensive than VOO. SCHX also carries a 0.04 percent annual fee and holds 760 stocks. That ETF can also be traded commission-free by Schwab clients.