SPY vs VOO: The Ultimate S&P 500 Showdown
Compare the oldest S&P 500 ETF (SPY) against Vanguard's low-cost juggernaut (VOO) to see which fits your investment strategy.
The Fee Difference: Does 0.06% Matter?
When analyzing ETF expense ratios, both of these funds are remarkably cheap compared to the broader mutual fund industry. SPY charges 0.0945% annually, while VOO charges a mere 0.03%.
For a long-term buy-and-hold investor, that 0.0645% difference might seem trivial. However, compounded over 30 years on a $100,000 portfolio growing at an average market rate, the Vanguard option would leave you with thousands of dollars more in your pocket simply by minimizing the ongoing drag of fees.
Structure and The "Cash Drag" Effect
One of the most under-discussed differences between these two titans is their legal structure. State Street's SPY was the pioneer—launched in 1993, it was built as a Unit Investment Trust (UIT). Under UIT rules, the fund is not permitted to reinvest the cash dividends it receives from underlying companies back into the market immediately. Instead, it must hold that cash in a non-interest-bearing account until it is distributed to shareholders quarterly.
Vanguard's VOO, launched much later in 2010, is a traditional open-end fund. It can immediately reinvest intra-quarter dividends, keeping the money working in the market. During strong bull runs, this lack of "cash drag" allows VOO to track the index just a microscopic bit closer than its older rival.
Liquidity: Why Traders Stick With SPY
If VOO is cheaper and doesn't suffer from cash drag, why does SPY still have more Assets Under Management? The answer lies with institutional investors and active traders. SPY has unparalleled liquidity.
Because SPY has been around for over 30 years, it has built a massive ecosystem of options trading. The bid-ask spreads on SPY options are incredibly tight, sometimes just a penny wide. For day traders, hedge funds, or anyone executing complex options strategies, the cost savings of SPY's superior liquidity far outweighs the higher expense ratio. For more on index fund choices, see our complete guide to choosing an S&P 500 fund or compare these to other funds in our ETF Comparison Tool.
Frequently Asked Questions
Why is VOO's expense ratio lower than SPY?
VOO is structured as a traditional open-end fund and managed by Vanguard, which is known for its at-cost fee model, allowing it to charge just 0.03%. SPY, created in 1993, is structured as a Unit Investment Trust (UIT), which carries slightly higher operational costs and has maintained its 0.0945% fee structure.
Can I trade options better on SPY or VOO?
SPY is universally preferred for options trading because it has significantly higher daily trading volume and open interest. This results in tighter bid-ask spreads and much better liquidity compared to VOO, which is crucial for active traders and institutions.
Do SPY and VOO pay the same dividends?
Because they hold the exact same 500 companies in the exact same proportions, their gross dividend yields are essentially identical. However, because VOO has a slightly lower expense ratio, its net dividend payout to investors might be marginally higher over long periods.
What does a Unit Investment Trust structure mean for SPY?
Because SPY is a Unit Investment Trust (UIT), it cannot reinvest cash dividends paid by underlying companies back into the fund immediately. It must hold that cash until the next distribution date. It also cannot lend out its shares to earn extra income, unlike VOO.
Is it worth switching from SPY to VOO for the lower fee?
If you are a long-term buy-and-hold investor with a large balance in a taxable account, the tax hit of selling SPY to buy VOO would likely far outweigh the 0.0645% fee savings. However, for new money or inside a tax-advantaged account like an IRA, choosing VOO is generally more cost-effective.