Each of the three largest providers of U.S.-listed exchange-traded funds has a product tracking the S&P 500 Index, and you would think they’re all the same, right? In terms of performance, the answer is essentially yes (though fees slightly influence the outcome). Regarding recent asset flows, the disconnect is so huge it’s hard to believe we’re talking about the same product category.
Through Tuesday’s market close, the iShares Core S&P 500 ETF (IVV) from BlackRock led the industry in asset inflows for the past one-month period with $4.3 billion, followed by the Vanguard S&P 500 ETF (VOO) with $2.6 billion, according to XTF.com. The granddaddy of all U.S. ETFs in terms of age and size, the SPDR S&P 500 ETF Trust (SPY) from State Street Global Advisors, had the largest one-month outflows of $12.4 billion.
It’s basically the same story quarter-to-date, with IVV and VOO leading the way in asset inflows with $6.7 billion and $3.3 billion, respectively. SPY was second in outflows at $4.8 billion (it had the most quarter-to-date outflows through Monday’s trading).
And on a year-to-date basis, VOO has the most inflows with $12.5 billion, while IVV is third with $8.1 billion. (The iShares Edge MSCI Min Vol USA ETF, with the ticker USMV, was second in year-to-date inflows.) SPY leads the industry in outflows this year with $20.6 billion.
At first blush, the huge discrepancy seems strange considering that SPY’s portfolio overlaps those of both IVV and VOO to the tune of 99%, whereas IVV and VOO have a 100% overlap, according to ETF Research Center. And SPY—far and away the biggest U.S.-listed ETF with assets of nearly $261 billion—is a commonly used ETF benchmark to gauge the health of U.S. equities. Considering all that, why are people jumping ship from this bellwether fund at such prodigious rates?
Fund fees play a role. VOO trades with a puny expense ratio of 0.03%, and IVV is right behind at 0.04%. SPY trades at a cheap 0.09%, yet that’s more than twice as pricey as IVV and three times the cost of VOO.
“Investors have been trading down in cost,” says Todd Rosenbluth, head of ETF and mutual fund research at CFRA.
And that ties into the other part of the equation; namely, these three ETFs play to different audiences. “SPY, as the oldest, largest and most-frequently traded ETF, has more of an institutional investor following with a large usage tied to hedging,” Rosenbluth explains. “Whereas the wealth advisory-led portfolios increasingly are using IVV and VOO as core holdings for long-term investment purposes.”
And that’s fine by Matthew Bartolini, managing director at State Street Global Advisors and head of SPDR Americas Research.
“SPY is basically the market’s tool to express views in the market’s direction in a cost-efficient manner,” he says.
Bartolini notes that because SPY is a market barometer for U.S. equities, its asset base ebbs and flows with market sentiment and trading activity. “We’ve touched about $300 billion in assets and have gone down to about $250 billion,” he says. “We were hovering around $285 billion before the most recent sell-off.”
When markets are bullish, people go long on SPY. When volatility strikes, sophisticated investors—mainly larger institutional players—use the fund to de-risk their allocations via the use of leverage and options.
“During the recent sell-off we had three days with $3 billion, $5 billion and $3 billion in outflows,” Bartolini says. “Added together, we had more outflows than our competitors have had inflows all year."
He notes that many tactical investors take short positions in SPY. “Short interest on SPY dominates all of our competitors in the S&P 500 arena," he says. "So we’ll have flows based upon a wide swath of investor viewpoints that are impacted by what the market is doing.”
Investor Base
SPY’s reputation as a trading tool for institutional investors is merited, but not entirely accurate. Bartolini says larger institutional and international traders, who tend to trade in bulk, represent about 40% of SPY’s current outstanding shares. He notes that direct retail, or mom-and-pop investors account for roughly 15% of SPY’s ownership, while the rest comprises the broad wealth-advisory market.
“We can’t be a $260 billion fund without some people who are buy and hold,” he says.
Still, institutional investors are a key constituent for SPY. And given that SPY is more than twice as expensive as either IVV or VOO (which are the second- and third-largest U.S.-listed ETFs with assets of $181.2 billion and $117.7 billion, respectively), and given that institutional investors like to save a buck or two when they can, why don’t they bail on SPY and switch to IVV or VOO?
“It’s a couple of things,” Bartolini says. “One is the consistency and persistency of SPY’s spread in times of either tranquility or volatility. Much like Cal Ripkin, it’s an ironman every day. We’re consistently at a penny spread, while our competitors didn’t have the same trading experience [during 2019’s fourth-quarter meltdown], and we’ve seen that time and again.”
SPY’s average bid/ask ratio is 0%, versus 0.01% for both IVV and VOO. For most retail investors, that minuscule difference is insignificant. For large, active traders who make frequent bulk trades, a consistently low spread across different market conditions helps maintain a low total cost of ownership.
“Tight bid-ask spreads coincide with an abundance of liquidity,” Bartolini says, adding that ample liquidity can be an institutional trader’s friend. “It’s great for large traders who don’t want to reveal their hand when making trades.”
Low-Cost, Large-Cap For The Masses
Rather than SPY, the SPDR Portfolio Large Cap ETF (SPLG) can be viewed as State Street’s direct competitor to IVV and VOO regarding retail investors. That fund launched in 2005, but experienced a makeover in October 2017 when State Street refurbished 15 existing equity and fixed-income ETFs into ultra-low-cost products.
Formerly known as the SPDR Russell 1000 ETF (ONEK), the current SPLG fund is a $2.7 billion product based on a proprietary large-cap index that tries to capture roughly 90% of the U.S. equity market. It had 733 holdings as of yesterday. As part of its makeover, SPLG’s expense ratio was lowered from 0.10% to 0.03%, which equals VOO and is one basis point less than IVV.
“It’s a way to appeal to an audience that’s more expense-ratio conscious than liquidity conscious,” says Rosenbluth from CFRA. Plus, he adds, SPLG has generally outperformed SPY.
In fact, SPLG is up 18% since its relaunch nearly two years ago, versus a 17.4% gain for SPY. And SPLG has slightly bested SPY, IVV and VOO year-to-date and during the past one-year period (though it slightly trails the other three funds during the past month and on a quarter-to-date basis.)
Meanwhile, SPY has slightly underperformed its two less-expensive S&P 500 rivals during the past one-, three- and five-year periods. During all three time frames the pecking has been VOO first, IVV second and SPY third in terms of share price performance. Granted, the differences aren’t much. But the rankings have consistently correlated with each product’s expense ratio, proving once again that fees matter—particularly among funds chasing the same broad-based index.
But for institutional and other tactical traders more concerned with tight spreads and liquidity when trying to execute their long or short strategies, SPY’s slight underperformance evidently doesn’t matter.