Discounted QQQ, SPY Clones Pulling in Cash

Investors are pumping money into smaller, cut-rate copies of popular ETFs.

Jeff_Benjamin
|
Wealth Management Editor
|
Reviewed by: Kent Thune
,
Edited by: Ron Day

In an investing environment where every basis point is calculated, it’s natural to wonder why anyone would own the SPDR Gold Trust (GLD) at 40 basis points when they could get the same exposure through the SPDR Gold MiniShares Trust (GLDM) at just 10 basis points?

Based on the size of the $55 billion GLD, compared to the $6.4 billion GLDM, some investors are willing to pay more. But that doesn’t mean all investors should pay more for essentially the same thing.

The GLD-GLDM duo represents one of a tidy group of ETFs that are uniquely tailored for two broad investor categories: Large institutional investors that place a priority on liquidity, and longer-term retail-class investors that can benefit from lower fees.

Other examples include the SPDR S&P 500 ETF Trust (SPY) at 9 basis points and the SPDR Portfolio S&P 500 ETF (SPLG) at 2 basis points, and the Invesco QQQ Trust (QQQ) at 20 basis points and the Invesco Nasdaq 100 ETF (QQQM) at 15 basis points.

Investors like the discounts: so far this year, QQQM has grabbed $2.41 billion, SPLG has pulled in $1.69 billion and GLDM has had inflows of $64.2 million.

For ETF issuers, it seems almost nonsensical to offer the same investment exposure for less. But there is a method, and a rationale, behind the madness.

“When we looked at the kind of growth we’ve seen in the ETF universe, we looked at QQQM as a more retail-friendly version,” said Ryan McCormack, senior factor and core equity ETF strategist at Invesco.

QQQ vs QQQM

QQQM, at $21 billion is still tiny compared to the $245 billion QQQ, but with $8 billion worth of inflows last year QQQM was second among all Invesco ETFs behind the Invesco S&P 500 Equal Weight ETF (RSP), which took in $10 billion.

The lower-cost access to a tech-heavy index that gained nearly 55% last year also earned QQQM a spot as a finalist in the ETF of the Year category at the upcoming etf.com annual awards.

McCormack said while liquidity for QQQ and QQQM is “pretty much identical,” the larger QQQ still makes more sense “for someone looking to be hyper, hyper short term.”

Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors, also cited liquidity as a reason some investors are drawn to the higher-cost ETF versions. But explained that there is more to it than just liquidity.

“With our dual product strategy, we’re creating versions that appeal to a distinct user base,” he said. 

SPY vs SPLG

In the case of SPY, for example, the nearly $500 share price can be difficult for investors with smaller accounts to add to diversified portfolios. 

SPLG, with a $58 share price, solves that issue, Bartolini said. 

On the other end of the spectrum, institutional investors are willing to pay more for the kind of trading volume of an ETF like SPY because it makes it easier to conceal large transactions.

That increased liquidity also appeals to investors trading options on the underlying index.

“One of the things that has increased the assets of SPY is usage of SPY options,” Bartolini said. “The options will be more liquid because SPY is more liquid.”

One of the major distinctions between the sets of dual ETFs is that the larger, higher-cost versions are structured as unit trusts as opposed to pure exchange-traded funds.

On that point, the benefit tilts toward investors in the lower-cost versions because the pure ETF structure offers the ability for securities lending which can offset some of the fund expenses.

Another advantage of the ETF structure is the ability to reinvest dividends at the fund level, which means the funds hold less cash and can more closely track the underlying index.

Invesco’s McCormack said the distinction between the unit trust and ETF structures has enabled QQQM to outperform QQQ on a net asset value basis by 9 basis points annualized since QQQM was launched in October 2020.

“That’s greater than just the 5 basis points per year of lower expense ratios,” he said.

As State Street’s Bartolini summed it up, “The line of demarcation really comes down to liquidity conscious versus cost conscious.”

Jeff Benjamin is the wealth management editor at etf.com, responsible for coverage related to the financial planning industry. This includes writing, hosting podcasts, webinars, video interviews and presenting at in-person events.


Jeff is a veteran journalist with more than 30 years’ experience covering the financial markets. He has won more than two dozen national and regional awards for his reporting. He most recently worked as a senior columnist at InvestmentNews where he wrote about investment products and strategies, as well as the broader financial planning industry. Prior to that, Jeff worked as an analyst at Cerulli Associates where he researched and wrote reports on the alternative investments industry. Jeff also worked as a money management reporter at Dow Jones Newswires, where he covered the mutual fund industry.


Based in North Carolina, Benjamin is a former Marine and has a bachelor’s degree in journalism from Central Michigan University.