Why Not SPY?

About: SPDR S&P 500 Trust ETF (SPY), VOO
by: Caprice Catalano

When looking for an ETF tracking the S&P 500, investors often default to SPY.

With strong diversification and high liquidity, SPY appears to be an all-in-one investment.

However, in a deeper dive analysis, VOO appears to provide stronger returns and higher accuracy in tracking its benchmark for a lower expense.

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SPDR S&P 500 (SPY) is often seen by the common investor as a one-stop shop investment. Immense diversification and high liquidity at a low price - why not invest? Well, investors have failed to consider several factors and have fallen trap to conformity bias. In a closer examination of the ETFs tracking the S&P 500, Vanguard S&P 500 (VOO) rises as the superior investment opportunity.

At a quick glance of the returns on each of these fund's net asset value (NAV) compared to the returns on the S&P 500, a slight discrepancy can be uncovered. The returns on VOO were higher among almost all returns calculated over several time periods.

Table Made by Caprice Catalano

Source: Caprice Catalano

Lower Expense Ratios Reap Higher Returns:

Every ETF investor is aware that low expense ratios are crucial. Low expenses help boost returns, as less fees result in more money being invested to grow and compound over time. VOO is beating SPY in its expense ratio by 0.05%. Although the difference is relatively minor, expenses accumulate easily over time and can have a large impact on overall returns.

Regression Analysis Agrees:

Both of these exchange-traded funds have a record of exceptional performance in tracking their benchmark of the S&P 500. Thus, these ETFs have accomplished the feat of representing the current state of the U.S. economy with their portfolios containing large-cap stocks from all main sectors.

However, in a regression analysis conducted with daily returns from December 2015 to December 2018, VOO has seen slightly higher performance, with an R2 value of 99.76%. This value indicates that 99.76% of the variability in the daily returns of the S&P 500 can be explained by the daily returns of VOO. This value was 0.04% higher compared to the equivalent metric for SPY, which produced an R2 value of 99.72%.

Regression Output Completed by Caprice Catalano. Data Received From finance.yahoo.com

Source: Caprice Catalano

Median Tracking Difference Points to VOO:

To further distinguish the higher accuracy of the VOO in tracking its benchmark, the median tracking difference should be examined. The median tracking difference compares returns on the fund (NAV) to its underlying index for a daily series of the overlapping 12-month period. In the last 12 months, VOO experienced a median tracking difference of -0.05% with a maximum upside deviation of -0.04% and a maximum downside deviation of -0.07%. SPY failed miserably in comparison, experiencing a median tracking difference of -0.14% with a maximum upside deviation of -0.11% and a maximum downside deviation of -0.17%. The difference in their tracking was strong, as SPY's maximum upside deviation was 0.04% above VOO's maximum downside deviation.

It is important to consider the median tracking difference in conjunction with the expense ratio. In an ideal situation, an ETF's median tracking difference will be equal to its expense ratio because this indicates that the ETF is exactly correlating with the index, except for the fees. VOO's was extremely close to achieving this feat, with only a 0.01% difference in its expense ratio and median tracking difference. SPY's performed the worst in this aspect, as its median tracking difference exceeded its expense ratio by 0.05%.

Reinvesting Dividends: Another Point for VOO

Another highlight of VOO is the dividend reinvestment program that Vanguard offers. Through this program, investors can elect to have their dividends automatically used to purchase additional shares of the issuing security for no fees or extra commission. With no commission, investors can earn a solid return that is not diluted by expenses. SPY does not come with this option as it is restricted by its Unit Investment Trust legal structure to hold dividends in cash until they are paid out.

Table Created by Caprice Catalano

Source: Caprice Catalano

Does Liquidity Even the Playing Field?

A major consideration for ETF investors is liquidity. Overall, it is hard for any ETF to compete with SPY in terms of liquidity as the ETF has $249.33 billion in assets under management and has an average daily share volume of 96,022,118. VOO does not come close to this liquidity, with $97.32 billion in assets under management and an average daily share volume of 3,231,262. However, if you're planning to hold this ETF position long term, liquidity may not be a major factor that has to be considered in investment analysis.

Next Steps?

Through a deeper dive analysis, it is quite apparent that VOO has outperformed SPY in terms of tracking the benchmark at a lower cost.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.