Small Differences On Big S&P 500 ETFs

Sometimes it pays to think beyond the label when it comes to the giants.

One of the most common questions I get asked is, “How do I pick a _____ ETF?” We answer that question often by focusing on our scoring methodology: We rate every ETF based on efficiency, tradability and fit, and for the most part, a fund that scores high on all three delivers on its promises at a reasonable price, is easily tradable and provides clean, no-surprises exposure like you’d expect after reading the prospectus.

But how do you choose among three great funds all tracking the same index? That’s the conundrum ETF investors face with ETFs tracking the S&P 500. There are three choices, and they’re all excellent products. But they’re not identical.

Here’s how they stack up numberswise:

Any fund scoring over a 90 on any of these categories is doing something very, very right, and you wouldn’t go wrong with any of them. But as I said, there are differences—however slight—and those differences can lead you to different “best choices” depending on what kind of investor you are.

Let’s take each vector of analysis in turn, and see where it might lead you.

Efficiency

The FactSet Efficiency score measures how well a fund does what it says it’s going to do. That is, a great score would perfectly track the index it claims to, with no tax issues, no fees, no structural weirdness, no anything.

So why does the iShares Core S&P 500 ETF (IVV | A-99) win the day here with a perfect score of 100?

Let’s look at some of the key statistics we consider in our efficiency scoring:

Expense ratio is pretty straightforward, and obviously Vanguard wins the day with 0.05 percent in annual expenses. Vanguard also wins on actual holding costs as measured by tracking difference. We measure tracking difference by looking at rolling one-year comparisons of the fund’s actual performance versus the underlying index. Your nominal expectation should be for a fund to trail its index by exactly its expense ratio—which you can see is what both iShares’s IVV and Vanguard’s VOO do on an average year.

So why is the SPDR S&P 500 (SPY | A-99) so far behind, trailing its index by a median 0.15 percent—worse than the expense ratio? SPY is one of the very first ETFs, and as such, it uses a different structure at its core (a unit investment trust, instead of a traditional ’40 Act mutual fund).

One of the quirks of UITs is they can’t reinvest cash from dividends, leading to cash-drag in up-trending markets. They also can’t lend out securities from their portfolio to earn extra cash. Both VOO and IVV don’t have those restrictions, and they eke out a few extra basis points in performance as a result, year after year.

So what gives IVV the slight edge in efficiency scoring? Transparency. We think knowing what you own is critically important to most investors, and so funds can lose or gain points based on the frequency of their disclosures. Vanguard refuses to make daily portfolio disclosures, so we give them a tiny demerit for it.

So what does that mean for you as an investor? Well, if you’re a long-long-term buy-and-hold investor, you will likely get a very slight performance advantage over a long period of time by being in VOO or IVV over SPY. If you don’t care at all about disclosure, from a pure efficiency perspective, you’d be slightly better off in VOO.

Not Appearing In This Film: Commissions

You might think that this slight difference would have led everyone to invest solely with Vanguard, but there’s a missing piece here: commissions. VOO is available commission-free only at Vanguard. IVV is available at Fidelity & TD Ameritrade without commissions. That means for many individual investors, IVV can still be the cheaper choice over the long term.

On the other hand, if you’re a Vanguard investor, you’re set at Vanguard.

Tradability

All three of these ETFs are among the most liquid securities in the world, and from our scoring engine’s perspective, you can’t slip a piece of paper between them. But still there are reasons certain investors might choose certain ETFs to trade:

If your sole concern as an investor is trading, you can’t beat SPY. At $32 billion changing hands a day, you can execute nearly any size trade and only incur that half-a-basis-point spread. Does it really matter that the spread is 0.01 percent wider in IVV and VOO? Not to me. But if you were literally trading millions of shares a day, it would start to add up.

It’s also worth noting that as an authorized participant, Vanguard has gone out of its way to make it cheap and easy to work with them. You only need to show up with $25,000 worth of stocks to make a block of new shares, and it’s only going to charge you $500.

State Street, on the other hand, charges a hefty $3,000, with iShares splitting the difference. These normally would show up in the form of larger spreads, but liquidity begets liquidity, and at this point, none of these funds is much danger of trading wide.

The last thing to notice is the options market focus on SPY. Again, options traders tend to follow liquidity, so if you’re an institution executing complex delta-one arbitrage strategies involving ETFs, futures, options and actual stocks, you’ll likely focus on SPY.

Not Appearing In This Film: Handle

Most of us pay a commission per trade in our own brokerage accounts, and avoid it if we can help it by looking for commission-free products.

Many institutions, however, pay their commissions per-share. IVV and SPY have net asset values that start around $192 a share as I write this (the “handle,” in street patois). Vanguard has a handle of around $176. Technically, if you’re paying by the share, you’ll prefer the larger handle, so you can trade a certain value with fewer shares and less cost.

In this case, the handle difference is pretty minimal. In some cases, like the everlasting battle between the SPDR Gold Trust (GLD | A-100) and the iShares Gold Trust (IAU | A-99), handles loom large. GLD’s handle is 10 times as large as IAUs, and thus many investors continue to trade GLD, despite a significant cost advantage for IAU for long-term holders.

Fit

Like tradability, the differences here are incredibly minimal. We measure every ETF against a neutral benchmark to see what kind of extra risks or unexpected exposures you might get as an investor. In this case, our benchmark for all large-cap U.S. equities is the MSCI USA Large Cap Index.

So what explains the very small differences? Mostly, it’s noise. We perform two sets of analysis in fit.

The first looks at the differences in weights between our benchmark and the ETF itself, so we can suss out differences in everything from sectors to price-earnings ratios and price-to-book ratios to market cap. As you might expect, all three funds hold the same stocks in nearly identical weights, and thus all score about a 99—losing a few points because the S&P 500 has a decidedly small-cap tilt.

The second analysis we run is based on a regression analysis of the fund versus our benchmark. As we’ve seen, these funds don’t perform identically, because of small differences like securities lending and cash investment practices. Those small differences can yield slightly different regression results, and thus slightly different scores.

Not Appearing In This Film: Brand

Believe it or not, brand really matters to some people. It especially matters to financial advisors.

In general, financial advisors I’ve known are a pretty busy bunch. When ETFs came on the scene, a lot of financial advisors gravitated toward the iShares brand. It wasn’t by accident. iShares courted them heavily, supported them with marketing materials and events, even published guidebooks on how big ETF strategists were using iShares ETFs in complete portfolios.

iShares became a trusted brand for those advisors, and once an advisor has explained who iShares is to a customer, they’re pretty unlikely to call their clients back and say, “Hey, I found this other guy who’s half a penny cheaper.”

What Kind of Investor are You?

Not to get too deep, but often, an investment choice has as much to do with you as it does with the investment.

Each of these three funds has found its audience and has been successful in gathering assets and trading activity. While it’s fun to watch the monthly horse race in fund flows, the reality is that all three funds will likely continue to be successful with certain target audiences.

Are you a long-term investor who doesn’t care all that much about transparency or hyperliquidity? Vanguard’s probably your choice. Speed-trader or arbitrageur? You’re likely all-in on State Street’s SPY. Financial advisor who likes keeping your whole ETF portfolio “all in one brand,” or an investor focused on zero-commission trading? You’re probably an iShares customer.

Broad brushstrokes? Sure. Retail investors, huge institutions and sophisticated advisors use ETFs from all of these issuers—and the whole raft of smaller issuers as well.

But the point is that they often have good reason to look at the little details in making their decisions.

At the time of this writing, the author held no positions in the securities mentioned. You can reach Dave Nadig at [email protected] or on Twitter @DaveNadig.