If you are flushed with cash right now and are looking to make some investments, mutual funds are a great option. But, where does one begin?
Dig up some stuff on mutual funds, and you will most certainly come across ‘index funds’ or ‘index fund ETFs.’ Most advisors suggest that these are suitable investments for anyone.
SPY vs. VOO
Exchange Traded Funds (ETFs)
First off, let’s understand Exchange Traded Funds (ETFs). It is like a mutual fund, but instead, investors can trade them like stocks, something they cannot do with mutual funds.
Over the last few years, ETFs have emerged as an additional investment medium in their own right.
When people say ETFs, they usually mean two types: ETFs with managers who actively manage the fund and index funds.
Index funds typically follow the performance of a financial market index such as the S&P500 or sector index.
The fund mirrors the price changes with algorithms automatically increasing and reducing exposure to stocks within the index. They “hug” the beta of the copied index with little or no human input.
Now that we understand more about ETFs, let’s know what the best options are.
Among the many options available to you, SPY and VOO are two of the best. Here’s why.
- Firstly, both these ETFs track the S&P 500 Index, which comprises the largest 500 companies in the U.S. They also boast super large market caps and can assist you with building a helpful investment strategy.
- Since they track the S&P 500, you can rest assured that your fund will perform well as long as it is doing well. In 2021, when the rest of the stock market returned only 10% or so, the S&P 500 saw a whopping 28.7% in returns.
These funds are both excellent and have several similarities. Let’s take a quick look at a few.
They Both Track The S&P 500
Both these funds mimic the performance of the same index. The S&P 500 comprises the 500 largest companies in the U.S, so these funds have exposure to large-cap companies.
They Have a Similar Composition
If you look at the companies in these funds, you will find names like Apple, Google, Amazon, Facebook, JP Morgan Chase, etc. These also happen to be in the top 10 companies in the index. Primarily, these funds invest in tech, banks, and daily good companies.
They Are Also Reasonably Diversified
While 31% of these funds are in the top 10 companies, you will see that other companies help to raise their performance. Moreover, you won’t find more than 10% allocated to a single company.
While similarities exist, a few minor differences between the two can influence your decision in one direction or another. Let’s look at them in detail.
One of the most significant differences between these two funds is that while State Street Global Advisors Trust created the SPY in 1993, it wasn’t until 2010 that Vanguard launched VOO.
SPY has lasted in the market for nearly 30 years and is considered one of the oldest, most well-known, and liquid ETFs, with an expense ratio of 0.09%.
On the other hand, VOO is regarded as a low-cost ETF, with an expense ratio of 0.03% that has the stability of a brand like Vanguard.
The difference between the two expense ratios is 0.06%, and while it may not seem like much, one thing you must remember is that a higher expense ratio will eat into your returns.
Due to its lower expense ratio, VOO has a better return than SPY on a ten-year average. But with time, it can add up to a lot of money.
SPY is one of the most popular and most-traded funds in the market, so it is undoubtedly the better choice if you are looking at liquidity. If ETF trading interests you, then choose SPY. It is the winner of the two.
While VOO has a yield of 1.34%, SPY provides a yield of 1.30%. There isn’t a huge difference here, but the way these two funds distribute their yields differs. SPY does a large payout at the end of the year, whereas VOO tends to keep more evenly distributed.
SPY vs. VOO: Which Is Better?
Investing is always a personal choice, and it depends on your goals. Between the two, some minor differences could sway several investors in the direction of VOO because it is lower in terms of cost.
While cost might not play a significant role in many people’s decisions, it can cut your returns in the long run, something which many investors are not okay with. In other words, when you pay less for the management of your fund, you have more money in your hands in the long run.
Moreover, VOO is managed by Vanguard, which is owned by its customers. So, it takes better care of its investors, unlike State Street (the creator of SPY), which its shareholders own. Again, this is a personal choice and not something every investor would consider a decisive factor.
Investing is such that you always fear missing out on the best. However, you must have faith in your decisions. Choosing either of these funds is going to get you good returns because of their popularity and their composition.
Another vital piece of advice that young investors must keep in mind is that these funds can get you financial freedom. They both offer similar returns and exposure to large caps.
But for all this to happen, you need to wait out and play the game of patience with aplomb. Investing in the market or ETFs is for the long run, and it is only then that you can genuinely see growth.