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.
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:
|(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:
|(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: S&P 500 SPDR (SPY )
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. 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.
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. 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.
Be sure to see the 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.
See also how SPY has performed since the 2008 recession.
Under The Hood: iShares S&P 500 Index Fund (IVV )
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.
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.
Under The Hood: Vanguard S&P 500 ETF (VOO )
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 in 2010. 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 of the size of IVV and SPY, VOO offers 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.
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.
Disclosure: No positions at time of writing.