S&P 500 ETF Fee Impacts

Includes: IVV, SPY, VOO
by: Adam Jones

Expense ratios, the ratio of fees charged for the amount invested, are important when selecting mutual funds or ETFs as they compound over the life of the investment. They have the potential to quietly diminish returns significantly if not considered when selecting a new fund or ETF. Recently the government has enforced higher visibility of this information to keep all investors aware of what they are being charged. As a result, companies that run index ETFs have dropped expense ratios to rock-bottom levels to gain more investors.

Multiple companies run ETFs that mirror the S&P 500 and I was curious to see what difference the expense ratios make over a 10-year period. For the analysis, I compared three - Vanguard's offering (NYSEARCA:VOO), SPDR's offering (NYSEARCA:SPY), and iShare's offering (NYSEARCA:IVV). There are many ETF offerings that mirror similar indexes but to keep the analysis simple, I'm just looking at the S&P 500 mirror ETFs.

SPY is by far the largest ETF by assets, with over $105 billion. IVV is next with over $30 billion. VOO is the smallest with just over $6 billion. SPY is the ETF with the most liquid options market associated with it. This is important for strategies that involve both stock and options.

I assume a $100,000 initial investment, a theoretical 7% return per year, and a holding period of 10 years. There are many brokerages which waive trading fees for specific ETFs as long as they are held for a certain period of time, so for this analysis I neglected trading fees. For simplicity I assume expenses are taken out once per year instead of throughout the year which has a negligible effect on the total expense ratio fees. Also, there are no real differences in liquidity for these three offerings. All are quite liquid and have bid/ask spreads of $0.01 so the transaction costs are all roughly the same.

Vanguard 500 SPDR S&P 500 iShares Core S&P 500
Expense Ratio 0.05% 0.09% 0.07%
Initial Investment $100,000 $100,000 $100,000
Duration (years) 10 10 10
Theoretical Return 7% 7% 7%
Ending Value after fees $195,733.77 $194,951.85 $195,342.46
Total Fees Paid $737.31 $1,324.49 $1,031.20
Total Fees as percentage of ending investment 0.38% 0.68% 0.53%
Click to enlarge

From the table, the difference between the lowest and highest expense ratios available is $587 in related fees over 10 years. This is a negligible difference over the life of the investment, 0.3% of the ending value. If you are already invested in one of these three funds, it's probably not worth the hassle of changing investments simply to get to a lower expense ratio.

If you are about to make an investment in an S&P 500 ETF and don't plan to use options at all, the Vanguard offering, VOO, has the lowest expense ratio and will save long term investors money over the other choices. If your investing strategy involves options, your best choice is SPY due to the very liquid options market associated with the fund.

Disclosure: I am long VOO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.