IVV: iShares Core S&P 500
The SPDR S&P 500 (SPY | A-99) was the original U.S.-listed ETF, but several years later, with the launch of what is now known as the iShares Core S&P 500 ETF (IVV | A-99), it was confronted with its own doppelganger as a direct competitor.
IVV was one fund in a wave of roughly 40 launches from iShares, then a part of Barclays Global Investors, in 2000 that really established the ETF family as a major player in the space. While SPY was designed as a trading tool, BGI's lineup was more advisor-friendly, offering all the core index funds that would be on the average advisor's wish list.
IVV was offered as part of a plan to provide a complete and broad product family, according to former iShares head Lee Kranefuss, but BGI's internal models also suggested that the fund would not only drain assets away from SPY, but would come to represent 60 to 70% of the total iShares assets under management.
Objectively speaking, IVV has a better construction than SPY, which is a grantor trust and cannot reinvest dividends. IVV has no such handicap. But most importantly, it was—and still is—cheaper than SPY.
"We thought that price was all important. We thought there would be a big deflation of [SPY]," Kranefuss said.
But while IVV has never lacked for assets, it was only last year that the fund pushed its way past the iShares MSCI EAFE ETF (EFA|A-93) and finally became the second-largest ETF in the world, behind SPY.
IVV is far from a failed experiment. Kranefuss notes that IVV helped to drive down the price of the S&P 500 for investors, as well as to lower spreads. Prior to IVV's launch, SPY was trading a quarter wide.
What was really important about IVV though, Kranefuss says, was that it showed that price is not the only criteria that investors use in selecting an ETF. If it were the only criteria, SPY would have ended up with no assets.
SPY had the advantage of being the first to market and established liquidity. IVV gathered assets in part because of its lower price but also because iShares made an effort to compete on customer service, Kranefuss adds.
IVV currently has roughly $67 billion in assets under management compared with SPY's $163 billion. Given that more advisors are moving toward ETFs, however, that gap might not be as insurmountable as some may think.