S&P 500 ETF: Explore Your Options Before Investing
Warren Buffett is one of the most successful investors in history, and his advice to the rest of us is simple: invest in a low-cost S&P 500 index fund.
Buffett’s reasoning? Over the long term, it’s incredibly difficult to build a portfolio that outperforms the S&P 500, which has generated average annual returns of around 10% over a period of almost 90 years. Additionally, buying an S&P 500 ETF (exchange-traded fund) is an easy way for investors to buy a large chunk of the market for a relatively low price. (New to this field? Learn more about AND F.)
Investors clearly see the appeal: the three ETFs that track the performance of the S&P 500 are among the four largest funds in the world.
But how do you choose an S&P 500 ETF? Although eeny, meeny, miny, moe can be an approach, there are some differences you should be aware of before making a selection.
SPY, VOO and IVV: the 3 S&P 500 ETFs
If you are looking for S&P 500 ETFs, you may come across dozens of funds. Just because the S&P 500 is on behalf of a fund does not necessarily mean it follows the index as a whole. On the contrary, many of these ETFs track subcomponents, such as value or growth stocks, within the larger index.
But you won’t have to wade through a ton of options to pick an ETF that tracks the performance of the S&P 500 Index as a whole. There are only three, with the following trading symbols: SPY, IVV and VOO. The bigger one, SPY, just happens to be the oldest, the youngest, VOO, will soon carry the cheapest management fee and the middle one, IVV, has the higher trading price.
This chart summarizes some of the main differences between these ETFs:
State Street Global Advisors
0.04% currently; 0.03% effective mid-2019
* All data is current as of May 20, 2020.
Which S&P 500 ETF is the best?
The three S&P 500 ETFs are quite similar in two important ways: you will have no trouble finding these ETFs at most online brokers, and they are very liquid, which means they are easy to buy and trade. sell them any day.
We’re not here to pick a winner – the right fund for you is a personal decision – but there are a few nuances you may want to consider:
Expense reports. ETF VOO will soon offer the lowest management fees, around a third of ETF SPY. While the difference between expense ratios of 0.03%, 0.04%, and 0.0945% might seem insignificant, these fees can really add up. For every $ 10,000 invested, these respective expenses are $ 3, $ 4 and $ 9.45 each year. Then consider the difference with higher balances, such as $ 100,000.
Trading fees. A lot of best brokers for ETF investing offer hundreds of commission-free ETFs, but the list of specific funds varies from broker to broker. Fortunately, most of the big brokerages are no longer charging commissions on ETFs, stocks or options thanks to the October price war.
Price. There is a slight difference in the price at which each fund is currently trading. This shouldn’t necessarily be a deciding factor, but it can affect how many shares you can buy at any given time. At their recent lows, for example, you could have bought 23 ETF VOO shares against 21 ETF IVV shares.
Yield and return. There are slight differences between these funds, even though they all follow the same index. These differences generally relate to yield and yield. According to Morningstar figures, IVV ETF currently has the highest 12-month yield (income generated from interest and dividends). Meanwhile, VOO ETF currently has the highest five-year price return (the financial gain on the investment), but barely. While these statistics are worth noting, you shouldn’t base your investment decision solely on past performance.
You only need one
For some people, digging into the details is half the fun of investing. For others, everything is meticulous. Rest assured, you can’t go wrong with any of these funds. All three ETFs have below-average expense ratios and provide an easy way to buy a slice of the US stock market.
You might be tempted to buy all three ETFs, but only one will do. You won’t get any additional diversification benefit (i.e. combining various assets) because all three funds follow the same 500 companies. In addition, you could tie up money that could be better invested elsewhere.
Find out more about sector ETFs:
Whichever S&P 500 ETF you ultimately choose, this fund should serve as the foundation of your portfolio. Don’t know what to invest in next? Our guide on how to build a good investment portfolio offers some tips.