Closer Look At S&P 500 ETF Options

by on October 25, 2010 | Updated November 20, 2012

The S&P 500 Index is perhaps the world’s best known benchmark. First published in 1957, the cap-weighted index consists of 500 large cap U.S. stocks listed on either the NYSE or NASDAQ and has become a widely-followed barometer measuring the performance of the U.S. economy. The S&P 500 is a common benchmark for active managers seeking to generate alpha, but the index has also become one of the most widely-traded assets in the world, as the rise of indexed mutual funds–and more recently ETFs–have transformed benchmarks into investable securities. According to S&P, assets invested in products indexed to the S&P 500 total nearly $1 trillion, a figure that has increased as more and more investors have embraced indexing as an investment strategy [see also How To Pick The Right ETF Every Time].

ETFs account for a growing portion of assets indexed directly to the S&P 500, with the three U.S.-listed products seeking to replicate the index maintaining total assets just north of $135 billion. Still, that figure represents more than 10% of total ETF assets, highlighting the importance of S&P 500 exposure as both a cornerstone of long-term portfolios and an efficient tool for various short-term investment strategies [see also 101 ETF Lessons Every Financial  Advisor Should Learn].

Currently, there are three ETFs that seek to replicate the performance of the S&P 500 Index, giving investors a number of different options. And while these three ETFs are largely similar and all exhibit a near perfect correlation with the underlying index, they aren’t quite identical; some structural nuances differentiate each of these products (we cover this topic in detail below):

Ticker ETF Structure Expense Ratio Commission Free
SPY SPDR S&P 500 ETF Unit Investment Trust 0.09% Not Available
IVV iShares S&P 500 Index Fund Exchange Traded Fund 0.07% 3 Platforms
VOO Vanguard S&P 500 ETF Exchange Traded Fund 0.05% Vanguard

S&P 500 ETFs With A Twist

Thanks to the ongoing evolution of the ETF industry, investors now have a variety of instruments at their fingertips which give them the flexibility to access the popular S&P 500 benchmark with a twist:

Ticker ETF Expense Ratio
VSPY Direxion S&P 500 Volatility Response Shares 0.45%
VQT Barclays ETN S&P VEQTOR ETN 0.95%
SPGH UBS E-TRACS S&P 500 Gold Hedged Index 0.85%
SPHB PowerShares S&P 500 High Beta Portfolio 0.25%
SPHQ PowerShares Value Line Timeless Select Portfolio 0.52%
SPLV PowerShares S&P 500 Low Volatility Portfolio 0.25%
BARL Morgan Stanley S&P 500 Crude Oil Linked ETN 0.79%
RSP Guggenheim S&P 500 Equal Weight 0.40%
  • VSPY: This ETF takes a quantitative, rules-based approach to shifting exposure between the S&P 500 Index and cash depending on home volatile markets have been recently.
  • VQT: This ETN utilizes a dynamic strategy to allocate exposure across large cap U.S. stocks, volatility futures, and cash, depending on the current market environment.
  • SPGH: This ETN invests equal dollar amounts in long positions across S&P 500 and gold futures contracts.
  • SPHB: This ETF selects and holds 100 stocks from the S&P 500 Index which are deemed to have the highest sensitivity to market movements over the trailing 12-month period.
  • SPHQ: This fund consists of S&P 500 companies which are identified as reflecting long-term growth and stability for earnings and dividends.
  • SPLV: This ETF selects and holds 100 stocks from the S&P 500 Index which are deemed to have the lowest realized volatility over the trailing 12-month period.
  • BARL: This ETN offers exposure to S&P 500 Index futures and an equal-weighted combination of WTI and Brent Crude Oil futures contracts.
  • RSP: This fund is an alternative to market cap-weighted products, like SPY, IVV, and VOO; RSP features an equal allocation to each component of the S&P 500 Index, giving this ETF a unique risk/return profile.

Growth & Value S&P 500 ETFs

Investors looking to tap into the S&P 500 Index while staying true to their preferred style don’t have to look far to find some viable options: 

Ticker ETF Expense Ratio
SPYG SPDR S&P 500 Growth ETF 0.20%
VOOG Vanguard S&P 500 Growth ETF 0.15%
IVW iShares S&P 500 Growth Index Fund 0.18%
RPG Guggenheim S&P 500 Pure Growth ETF 0.35%
SPYV SPDR S&P 500 Value ETF 0.20%
IVE iShares S&P 500 Value Index Fund 0.19%
VOOV Vanguard S&P 500 Value ETF 0.15%
RPV Guggenheim S&P 500 Pure Value ETF 0.35%
  • SPYG: This fund holds growth companies from the S&P 500 Index.
  • VOOG: This cheaper alternative is linked to the same index as SPYG.
  • IVW: This ETF offers exposure to the large capitalization growth sector of the U.S. equity market.
  • RPG: This ETF contains only those S&P 500 companies with the strongest growth characteristics, giving it a much more targeted portfolio than SPYG, VOOG, and IVW.
  • SPYV: This ETF holds value companies from the S&P 500 Index.
  • IVE: This fund looks to track the performance of the large capitalization value sector of the U.S. equity market.
  • VOOV: This cheaper alternative is linked to the same index as IVE.
  • RPV: This ETF contains only those S&P 500 companies with the strongest value characteristics, giving it a much more targeted portfolio than SPYV, IVE, and VOOV.

Under The Hood: SPY vs. IVV vs. VOO

S&P 500 SPDR (SPY, A)

SPY is the oldest U.S.-listed ETF, having begun trading in 1993 as an innovation in the financial world. Since then SPY has become one of the largest and most-widely traded securities in the world; assets currently stand at about $105 billion and average daily trading volume exceeds 200 million shares. SPY is structured as a Unit Investment Trust (UIT), with State Street serving as the trustee. The UIT structure, very common among the earliest ETF products to hit the market, is somewhat restrictive–a feature that has both pros and cons [see also 5 Tips ETF Traders Must Know].

UITs must fully replicate their underlying index, and are restricted from lending out securities that make up their portfolio. For investors employing somewhat complex strategies that include options, these restrictions ensure that SPY will replicate the benchmark with near-perfect precision–reliability that investors utilizing derivatives demand. While all of the S&P 500 ETFs offer impressive liquidity, SPY also offers an incredibly-liquid options market [compare the open interests of SPY vs. IVV]. This further increases the appeal of SPY as a tool for investors looking to execute intra-day trades or those who maintain relatively short holding periods.

The trading volumes support this idea: nearly one third of SPY’s shares outstanding change hands every day; by comparison, IVV’s daily turnover is equivalent to only about 2% of shares outstanding. That implies that SPY, while certainly appropriate for buy-and-holders, is more widely used as a trading vehicle for more active traders [see also 17 ETFs For Day Traders].

Another unique feature of UITs relates to dividends. According to SPY’s prospectus, the ETF pays dividends four times annually, on the last business day of April, July, October, and January. Because SPY is a UIT, the fund cannot reinvest dividends paid by underlying holdings, but rather must hold them in cash until they are scheduled to be distributed to SPY shareholders. So if ExxonMobil, for example, pays a dividend on February 1, SPY would be required to keep that amount in cash until the end of April.

iShares S&P 500 Index Fund (IVV, A-)

IVV, like most other ETFs, utilizes an open-end structure that provides more flexibility to the portfolio manager. Though it generally replicates the underlying index very closely, IVV is permitted to use derivatives, portfolio sampling strategies, and lend out portfolio securities to generate additional income. Perhaps most importantly, the open-end structure allows for the immediate reinvestment of dividends, potentially resulting in enhanced returns during bull markets. Whereas SPY is required to keep dividends paid out in cash, IVV has the ability to invest distributions back into the components of the S&P 500 until it is scheduled to distribute them to IVV shareholders [see also Monthly Dividend ETFdb Portfolio].

The impact of this feature usually isn’t enormous, but it can contribute to slight return differentials between the two funds. Between the bear market lows in March 2009 (3/9/2009) and the end of that year, for example, SPY gained about 67.4%. IVV was up a slightly more impressive 67.7% during that same period. There are, of course, two sides to this coin. Reinvestment of dividends can adversely impact fund performance when markets are sinking. And indeed, during the equity market plunge of late 2008 and early 2009, SPY performed slightly better than IVV.

Vanguard S&P 500 ETF (VOO, A)

The most recent addition to the S&P 500 ETF space came relatively recently, as Vanguard rolled out a suite of ETFs linked to popular S&P 500 indexes. Vanguard was a pioneer in S&P 500 indexing, launching an indexed mutual fund seeking to replicate this benchmark in 1976. VOO maintains another unique structure that differentiates it from both IVV and SPY. Vanguard maintains a patent that allows it to offer ETFs as share class within larger index funds that also offer retail and institutional share classes.

There are some potential advantages to the share class structure of the Vanguard S&P 500 ETF. Although VOO is only a fraction the size of IVV and SPY, the total pool of assets across all share classes of the Vanguard product is about $94 billion. That allows VOO to offer the lowest expense ratio of the group, charging just five basis points.

While all ETFs have the ability to offer investors enhanced tax efficiency through the in-kind redemption process, VOO’s structure may offer additional tax benefits. In response to redemption requests from other classes of shareholders, Vanguard has the option to sell off high cost-basis securities, generating a capital loss in the process that can be used to offset any taxable gains. Of course redemptions of non-ETF share classes could also result in a taxable gain, but given the massive size of the S&P 500 fund such an event is unlikely unless a wave of redemptions were to occur [see Total Cost Of ETF Investing].

Verdict

While the three ETFs linked to the S&P 500 will generally deliver nearly identical exposure, they aren’t quite identical thanks to some structural nuances. Each of the three ETFs offering exposure to the S&P 500 have potential advantages, ranging from cost and tax efficiencies to near-perfect precision and reliability to enhanced flexibility that can boost returns. Different funds will be more appropriate for different investors; the lesson, as always, is to take a good look under the hood and do your homework before establishing a position [for daily ETF news and analysis, sign up for our free ETF newsletter].

Disclosure: No positions at time of writing.