One of the cheapest ways for an investor to diversify a portfolio is with an exchange-traded fund. The two largest ETFs in terms of assets are SPDR® S&P 500® ETF Trust SPY and Vanguard S&P 500 ETF VOO, which both passively track the S&P 500.
The S&P 500 selects 500 of the largest US stocks—roughly 80% of the US equity market. (Though as Amy Arnott points out, companies must also meet various other criteria to be included in the index.) While many investors view the S&P 500 as representative of the overall US market’s performance, it’s important to note that it only represents the performance of large-cap companies.
We take a closer look at SPY and VOO to see which S&P 500 tracker is the better choice for investors.
SPY and VOO Follow the Same Strategy
Morningstar associate analyst Brendan McCann, who covers both ETFs, says the bedrock of the strategy they follow is market-cap weighting.
“Market-cap weighting harnesses the market’s collective wisdom of the relative value of each holding with the added benefit of low turnover and associated trading costs,” McCann says. “It’s a sensible approach because the market tends to do a good job pricing large-cap stocks.”
Though McCann favors the market-cap-weighting approach, he acknowledges the potential risks in the strategy.
“When a few richly valued companies or sectors power most of the market gains, market-cap weighting may expose the strategy to stock- or sector-level concentration risk,” McCann says. “As of year-end 2024, the top 10 holdings made up the largest portion of the index (37%) in several decades, and the 34% allocation to technology stocks was the highest since the dot-com bubble. But this is not a fault in design. The S&P 500 simply reflects the market composition. In the long run, broad diversification, low turnover, and low fees outweigh these risks.”
SPY vs. VOO: Which ETF Is Better?
The Morningstar Medalist Rating can help answer this.
The Medalist Rating is the summary expression of our forward-looking analysis of investment strategies. The rating is expressed on a five-tier scale running from Gold to Negative. The top three ratings of Gold, Silver, and Bronze indicate that our analysts expect the investment vehicle to outperform on a risk-adjusted basis relative to its Morningstar Category index or category median over the long term.
Here is some key information about SPY and VOO:
SPY and VOO Key Metrics
Winner: Vanguard S&P 500 ETF
Both SPY and VOO are highly rated. “The funds accurately represent the large-cap opportunity set while charging rock-bottom fees, a recipe for success over the long run,” McCann says.
While the two ETFs follow the same strategy, they earn different ratings. VOO earns the top Medalist Rating of Gold, while SPY earns a Silver. McCann says the reasons are inefficiencies of the unit investment trust structure of SPY as well as a difference in fees.
SPY was launched as a unit investment trust, which prohibits its managers from engaging in some basic operations available to other ETFs. For example, the managers of SPY cannot reinvest dividends, use derivatives to equitize cash, or lend securities, which provides the fund with a small amount of additional income. Though these practices do carry some risk, it’s marginal. Morningstar analysts see a clear, albeit small, advantage for investors who choose VOO over SPY owing to its structural inefficiencies.
When it comes to fees, VOO charges 0.03%, while SPY charges 0.0945%. The difference may be minimal, but there’s no reason to leave cash on the table. With all else equal, the fund with the lower fee is more aligned with investors’ best interests.
