Breaking Down The S&P 500 ETF Price War

by on November 21, 2012 | ETFs Mentioned:

The S&P 500 is one of the most widely-followed indexes in the world, offering exposure to a basket of U.S. stocks that includes many of the world’s largest corporations. As such, the S&P 500 is a core of many long-term, buy-and-hold portfolios; it isn’t uncommon for this index to make up a substantial portion of investing strategies. For investors looking to establish exposure to the S&P 500, there are a handful of ETF options available out there; State Street, iShares, and Vanguard each offer funds linked to this benchmark.

Because the products are generally similar in terms of composition and holdings (the structures of each do feature some nuances), most investors will compare their options based on expenses. Below, we offer up an in-depth analysis of the total expense structure of these three exchange-traded products [sign up for the free ETFdb newsletter]: 

Expense Ratios

This is perhaps the easiest comparison to make–and the extent of the cost analysis done by many investors. The expense ratio represents the percentage of assets charged by the fund manager for maintaining the underlying basket of stocks, and will generally reduce the overall performance of the investment by a corresponding amount [see Cheapskate ETFdb Portfolio].

All three S&P 500 ETFs are extremely cheap–among the cheapest ETFs available. But they’re not quite identical; VOO holds a slight advantage over IVV and SPY:


Bid-Ask Spread

Another factor that must be considered when evaluating the total cost of S&P 500 ETFs is the bid-ask spread. Because ETFs trade on exchanges like stocks, investors aren’t necessarily able to buy and sell at the exact NAV of the underlying assets. Instead, trades are executed at prices that will clear the market — where buyers and sellers can be matched up [Download 101 ETF Lessons Every Financial Advisor Should Learn].

The less frequently a security trades, the larger the bid-ask spread generally is. That’s important because a large spread means an investor is more likely to buy at a premium or sell at a discount–two scenarios that can impact the total cost paid out of your pocket.

Again, all three S&P 500 ETFs are very liquid–average daily volume ranges from about a million shares (for VOO) to about 150 million (for SPY). And the bid-ask spreads are very close (and very small), but not quite identical:


Finally, it’s important to consider the commissions that you’ll pay when executing a trade–whether buying or selling [see All Commission Free ETFs].


If you have a Vanguard account, this is a no-brainer; use VOO and get the lowest expense ratio and commission free trading. If you’re on another platform, however, it will depend on the size of your position and the length of your estimated holding period [Download Free Report: How To Pick The Right ETF Every Time]. 

Assume, for example, that you’re purchasing $100,000 worth of exposure to the S&P 500, and plan on holding for a year. If you have a TD Ameritrade account, here’s what the fees would look like:

ETF Price Shares Purchased Spread Spread Cost Management Fees Commisions Total %
SPY $140 714 $0.01 $7.14 $94.60 $9.99 $111.73 0.11%
IVV $140 714 $0.01 $7.14 $70.00 $0.00 $77.14 0.08%
VOO $65 1,538 $0.02 $30.77 $50.00 $9.99 $90.76 0.09%

Now assume you’re holding a larger amount ($1 million) for a much longer period of time–say 20 years. In this case, the benefit of lower expenses really begins to show (note that this is a very simplified example–we assume that the asset value remains constant):

ETF Price Shares Purchased Spread Spread Cost Management Fees Commisions Total %
SPY $140 7,143 $0.01 $71.43 $18,920.00 $9.99 $19,001.42 0.10%
IVV $140 7,143 $0.01 $71.43 $14,000.00 $0.00 $14,071.43 0.07%
VOO $65 15,385 $0.02 $307.69 $10,000.00 $9.99 $10,317.68 0.05%

As is often the case with ETFs, the right pick for your portfolio will depend on your circumstances. If you’re buying for the long haul, it probably makes sense to minimize management fees through VOO’s rock bottom expense ratio. If you have a shorter time horizon, IVV or SPY might make sense depending on your trade-off between commissions and bid-ask spreads.

Disclosure: No positions at time of writing.