Hougan: 4 ETFs Stealing Market Share

May 19, 2014

The old rule about ETFs was that the first fund to market gets all the inflows. Now it’s the best funds.

It used to be that the first ETF to hit the market got all the inflows. That’s changing … for the better. Today it’s increasingly the best ETFs that are attracting the most attention.

Here are four ETFs where the largest and oldest funds are losing ground to newer/better/cheaper/different alternatives. Do you own the right funds?

S&P 500 ETFs: SPY Losing Ground To Newer Competitors
SPY 1-Year Flows: -$2.6B

IVV 1-Year Flows: $7.3B

VOO 1-Year Flows: $7.0B

The S&P 500 SPDR (SPY | A-97) is the largest, oldest and most successful ETF in the world, with more than $160 billion in assets. But despite its popularity, it’s not my favorite ETF tracking the S&P 500. I prefer both the iShares S&P 500 ETF (IVV | A-97) and the Vanguard S&P 500 ETF (VOO | A-96) to the venerable SPY.

What’s the difference? Because of the way SPY is structured, it is not allowed to reinvest its dividends over the course of each quarter. Instead, it simply holds them in cash. As a result, it has a small but persistent cash drag.

That means when the market is rising, SPY will tend to underperform peers like IVV or VOO. Not by much—maybe 0.05 percent a year—but by a little. Over the past year, SPY returned 15.04 percent on a net-asset-value basis, while IVV returned 15.11 percent and VOO 15.15 percent. That’s fairly typical in a rising market.

For a long time, investors didn’t seem to care, sticking with SPY because it was familiar and highly liquid. But recently, investors have favored the modernized and lower-cost IVV (0.07 percent expense ratio) and VOO (0.05 percent expense ratio) over SPY (0.09 percent fee).

In the past year, IVV has pulled in $7.3 billion and VOO $7.0 billion in new assets, while SPY has bled $2.6 billion in outflows. In fact, both IVV and VOO have outpolled SPY by billions since the market bottomed on March 9, 2009.

SPY is still a great fund, and will likely remain the largest ETF in the world for decades (if not forever). But IVV and VOO are catching up.


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