Why Are There So Many Different S&P 500 ETFs?
Doing a quick google search of “S&P 500 ETF” yields plenty of different ETFs. In fact, when we search we often get lists of S&P 500 ETFs. Whole lists!
But why are there so many of them? I just need one! One good one will do!
Well, to get to the bottom of this, we need to understand that ETFs are provided, usually, by fund management companies. Such companies include companies such as Vanguard, iShares (by BlackRock) and Invesco just to name a few. There are plenty more but these are some of the bigger and more well-known ones.
You can think of it like banks. Why do we have more than one bank in Singapore when we probably only need one bank for most of our banking needs? Locally, we already have the three main banks: DBS, OCBC and UOB. For basic services, all of them kind of have similar services, with slight variants.
Similar to banks, each of these fund management companies will have their own variant of an S&P 500 ETF to have a stake of the customers who are seeking an investment in the S&P 500 index.
Moreover, fund management companies will also have different ETFs for different exchanges, to allow investors in other countries to invest in the S&P 500 as well.
Popular S&P 500 ETFs include:
So, What’s The Difference Between These S&P 500 ETFs
One of the key factors would be the expense ratio of the ETF. Expense ratio is simply the amount charged (based on the Net Asset Value of the fund) by the managers of the fund for their services. You can think of it as a management fee for the fund.
Since an index ETF only tracks an index and no actual decisions are made on the part of the fund managers, the expense ratio for index ETFs tend to be much lower than actively managed funds where the fund manager makes the decisions to buy and sell certain stocks.
For S&P 500 ETFs specifically, the lowest expense ratio we have now is sitting at 0.03% with a tie between IVV and VOO. CSPX and VUSD are also tied but at 0.07%. SPY is in last place at a significantly higher expense ratio of 0.09%.
Liquidity is another criterion worth considering. Liquidity is often hard to measure, but it can be estimated through the Average Daily Volume of the ETF. This refers to the average total value of all the shares of the ETF that has been traded within the day.
This is important because it affects how easy it is to buy and sell shares of the ETF. More importantly, it affects the spread of the ETF.
Spread refers to the difference between the prices that buyers are asking for and the prices that sellers are willing to sell at. When the market is open, the buyers and sellers will set their respective prices. When the two prices meet, the order will execute.
However, let’s say there is only 1 buyer and 1 seller, where the buyer is willing to buy at $200 and the seller is only willing to sell at $210. That’s a $10 difference, which either the buyer or seller will have to budge from their position to fill the order.
On the other hand, for an ETF with higher volumes, there will be more buyers and sellers, which would create a smaller spread, maybe $200 and $200.10. As such, the buyers and sellers do not have to deviate as much from their position to fill their orders.
In general, the US-domiciled ETFs have higher liquidity than their LSE counterparts.
If we look at our S&P 500 ETFs from earlier, SPY easily trumps the rest with an average of $21.45B transacted everyday, with the second closest being IVV at $1.33B per day.
On the other hand, those on the LSE see much lower volume transacted daily, with CSPX at $50.4M per day and VUSD at $17.36M.
Assets Under Management
Assets Under Management (AUM) refers to the total amount invested in the fund. While this doesn’t affect the performance of the fund, it is sometimes used as a gauge of the financial strength of the ETF provider as well as how it stands against its competitors.
Generally, AUM ties in with Liquidity as well. As such, SPY leads with an AUM of $328B and IVV trails behind at $237B. CSPX and VUSD are much lower at $44.7B and $29.29B.
Tracking Error refers to the difference in the performance between the index and the ETF. Do note that tracking error can go both ways, meaning that the fund can also sometimes outperform the index that it is tracking.
Even though this sounds quite important, usually, ETFs will underperform in some years and over perform in some, effectively balancing out the tracking difference over long periods of time.
IVV has a median tracking difference of -0.03% over the last 12 months, while VOO is at -0.05% over the same period. CPSX has a tracking error of around 0.02% and VUSD at 0.07%.
But if we look further back to 5 years, their performance is almost identical to each other.
Okay, we’re at the last point now!
Withholding Tax is a tax levied on the dividends which are paid to a person outside of the country. So for most of us, we are Singaporeans and likely also Singapore tax residents. However, if we buy ETFs from US exchanges or the London Exchange, the governments of these countries impose a withholding tax on the dividends paid out by these ETFs.
For CSPX and VUSD, the withholding tax applied to dividends will be 15% whereas those on the US exchanges have a 30% withholding tax applied to their dividends.
This means that if CSPX issues a $10 dividend to you, the net amount received will be only $8.50 (assuming no dividend handling fee from your broker). If IVV issues a $10 dividend to you, the net amount paid out to you will be $7.
So, here we can see that there’s a trade off between withholding tax on dividends and the expense ratio, since the S&P 500 ETFs on the LSE have a higher expense ratio but are subjected to lower withholding tax on dividends.
So, Which is the Best?
To be fair to all the ETF providers, there is really no ‘best’ S&P 500 ETF. But for myself, if I had to choose one for myself now, it would probably be CSPX or IVV (if you have no access to LSE).
Both options boast low expense ratios, good liquidity and large AUM. Additionally, they are provided by iShares by BlackRock, which is the largest asset manager in the world as of end 2019.
But either way, if you have already chosen another S&P 500 ETF as your core investment, fret not, there likely will not be much of a difference between your investments and mine. What’s ultimately more important at the end of the day, is that we have both started investing and we are well on our ways to attaining our financial goals!
Photo by Andrea Piacquadio from Pexels