The competition among top S&P 500 exchange-traded funds (ETFs) is heating up as two key players – Vanguard’s S&P 500 ETF (VOO) and iShares Core S&P 500 ETF (IVV) – are on track to surpass the long-time leader in assets under management (AUM), the SPDR S&P 500 ETF Trust (SPY). Both VOO and IVV are growing rapidly, with VOO expected to ultimately take the lead over SPY due to stronger cash inflows and advantages tied to mutual fund migration. 

This shift could mark a significant change in the world of ETFs, but before we dive into it, understanding the dynamics at play in this ETF race is important, especially those seeking to make informed decisions about where to allocate their money.

ETFs have seen a surge in popularity in recent years, driven by their tax efficiency, transparency, and accessibility for both institutional and retail investors, and with more mutual funds converting into ETFs, the landscape has shifted, allowing investors to access the same underlying assets with lower costs and greater flexibility. This trend is particularly noticeable in the rise of index-focused ETFs like those tracking the S&P 500.

SPY, VOO, and IVV all follow the S&P 500 index, which means that they allow investors to have exposure to the index that represents 500 of the largest U.S. companies. All three funds may seem similar at first glance, however, there are subtle differences in fees, trading volume, and their battle for dominance comes down to more than just the index they track.

One of the key factors propelling VOO and IVV ahead of SPY is their lower expense ratios. When we talk about expense ratios, we refer to the annual cost of owning a fund, and they can have a significant impact on long-term returns. Both VOO and IVV boast an impressively low expense ratio of just 0.03% per year, compared to SPY’s 0.09%. These numbers may seem small, nonetheless, the difference adds up over time, particularly for long-term investors. 

Let’s say you invest $10,000 in both VOO and SPY, and both funds grow at an average annual return of 7% over 20 years. At the end of the period, the total value of your investment will be reduced by the fund’s expense ratio. For VOO, with an expense ratio of 0.03%, you will pay $3 in fees for every $10,000 invested annually. Over 20 years, this amounts to about $686 in total fees, leaving you with an approximate final balance of $38,547. For SPY, with a higher expense ratio of 0.09%, you’ll pay $9 in fees annually for every $10,000 invested. Over the same 20-year period, the total cost in fees would be around $2,032, resulting in a final balance of $37,201.

Thus, while the annual fee difference seems small, it clearly adds up over time, highlighting why VOO and IVV are becoming increasingly attractive to those who want to minimize fees while gaining exposure to the S&P 500.

Another important aspect to consider is trading volume. SPY, being the oldest and largest ETF tracking the S&P 500, maintains the highest average daily trading volume at $24.3 billion. This level of liquidity makes SPY a favorite among institutional investors and traders who need to move large amounts of money quickly without affecting the market price. Meanwhile, VOO and IVV are steadily catching up as VOO’s average daily volume stands at $2.3 billion, surpassing IVV’s $1.9 billion. Many may say that VOO and IVV are both still far behind SPY in terms of trading volume, however, their steady increase in inflows suggests growing interest, especially from retail investors. In addition, for individual investors, the gap in trading volume between these ETFs may not be as significant, as they generally deal with smaller transactions, thus, liquidity is not as pressing a concern. In fact, many are willing to trade slightly lower liquidity for the long-term cost savings offered by VOO and IVV’s lower expense ratios. 

Moreover, despite SPY’s trading volume advantage, it is the flow of new money into these funds that’s raising eyebrows. Over the past five days, VOO has seen inflows of $3.4 billion, compared to $3.1 billion for SPY and $1.4 billion for IVV. This pattern extends over a longer period as well. Year-to-date, VOO has attracted a massive $63.9 billion in new investments, outpacing IVV’s $45 billion. In contrast, SPY has experienced outflows, with investors pulling $19.2 billion from the fund.

Furthermore, an additional advantage that VOO has over both IVV and SPY is its ability to attract money from mutual fund conversions. The shift from mutual funds to ETFs has been a major trend in recent years, as ETFs offer greater tax efficiency and transparency compared to traditional mutual funds. Investors in Vanguard’s 500 Index Fund Admiral Shares (VFIAX), for example, can convert their mutual fund shares into VOO ETF shares at no cost, making the transition seamless and cost-effective. 

Now, what does this all mean for us as investors? Well, first of all, let’s remark that if you are looking to invest in the S&P 500, all three of these ETFs – SPY, VOO, and IVV – offer solid options. They all have delivered similar performances this year, with each fund returning slightly over 16%. However, the differences in expense ratios, trading volume, and the source of inflows can help guide your decision in regards which of these ETFs may suit you best.

If you prioritize liquidity and expect to move large amounts of money in and out of the market quickly, SPY’s high trading volume may be appealing. Keep in mind that it offers the most flexibility for large trades and remains the most established ETF of the three.

Nevertheless, if you are a long-term investor focused on minimizing costs, VOO and IVV’s lower expense ratios make them strong contenders. Over time, the lower fees will leave more money in your pocket, particularly if you plan to hold the ETF for many years.

For retail investors, VOO’s growing popularity and its ability to attract money from mutual fund conversions could be especially attractive. As the demand for low-cost, tax-efficient investments continues to rise, VOO is well-positioned to continue gaining market share. On the other hand, IVV offers many of the same benefits as VOO, but without the mutual fund migration advantage. 

Ultimately, the race for dominance among S&P 500 ETFs is far from over, but it is clear that VOO and IVV are gaining ground on SPY. And as funds continue competing for market share, we are likely to see continued innovation, lower fees, and more options to suit our individual investment needs. Thus, this type of competition Is actually good news for investors.

Also, whether you choose SPY for its unmatched liquidity, VOO for its cost efficiency and mutual fund conversion benefits, or IVV for its blend of affordability and performance, as stated before, all three ETFs provide excellent exposure to the S&P 500. So, before making a decision, be sure to select the ETF that best suits your investment goals.