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Why would an investor choose SPY over VOO, even though SPY has higher fees and lower tax efficiency?
Investors might lean toward SPY because of its outstanding liquidity and high trading volume, making it an excellent option for short-term trades or for those who value quick and seamless transactions. Its narrower bid-ask spreads can also help frequent traders save on transaction costs.
Although SPY’s expense ratio and tax efficiency aren’t as competitive as VOO’s, its strong liquidity and established market presence often make it the preferred choice for investors with particular trading strategies or shorter time horizons.
How do SPY and VOO differ in terms of tax efficiency, and what impact do their structures have on investors?
SPY and VOO differ in how they handle taxes, largely due to their structural designs. SPY operates as a Unit Investment Trust (UIT), which means it cannot reinvest dividends immediately. This limitation might result in slightly less tax efficiency. On the other hand, VOO, structured as a traditional ETF, has more flexibility to reinvest dividends and manage capital gains, potentially making it more tax-friendly over time.
Another notable difference lies in how each ETF deals with dividends. SPY holds dividends in cash until they are distributed quarterly. VOO, however, reinvests dividends until the payout date, offering a small compounding edge for long-term investors. These distinctions can play a role in determining which ETF better suits your financial goals and tax planning needs.
How does VOO’s dividend reinvestment feature compare to SPY’s cash dividend payouts for long-term growth?
VOO offers an automatic dividend reinvestment feature that can boost long-term growth by letting dividends compound over time. Unlike SPY, which pays out dividends in cash, VOO uses those dividends to purchase additional shares automatically. This approach can increase returns as the reinvested dividends begin to generate their own earnings.
This compounding effect makes VOO an appealing option for investors aiming to maximize growth over time, particularly for those who prefer a hands-off method to reinvest their income rather than manually handling cash payouts.
Choosing between SPY and VOO gets asked about constantly, so here’s a look at how they actually stack up when digging into some key numbers.
I created a hypothetical $10k portfolio in Dividend Watch to analyze the differences, since most brokers don't offer similar dividend/total return insights.
If you tossed $10K into each a year ago, they ended up basically the same. VOO returned about $1,895, SPY about $1,846. Annual income from dividends is also close... $134 for VOO vs $127 for SPY. Not exactly life-changing differences.
Dividends are steady in both, since they track the same S&P 500 companies. SPY’s been paying a little more per share historically, but because VOO has a lower expense ratio (0.03% vs 0.09%), it usually edges out slightly better total returns over time. Not by a lot, but over decades it adds up.
Holdings are essentially identical. Both track the S&P 500, so you’re owning the same Apple, Microsoft, Nvidia, etc. The sector weightings are virtually the same too... tech around 35%, financials ~13%, healthcare ~9%.
So the real difference? Fees, it appears. SPY’s been around longer (since the 90s), but it charges more. VOO is newer, cheaper, and has become the favorite for long-term holders who care about squeezing every last bit of performance.
At the end of the day, they’re basically interchangeable. Most people just pick VOO for the lower expense ratio, unless they’re day trading and want SPY’s liquidity.
Do you stick with one, or doesn’t matter since they move in lockstep?
Everyone is saying VOO and chill, but isn’t SPY and chill a better option? I’m looking to invest for retirement over long term, what etfs do you recommend for my portfolio? I have 100 percent VOO right now. I was considering 80% VTI 20% QQQ but now I am considering just 100% SPY. Thoughts? Recommendations will be appreciated. Thanks.
I (30yo) have a brokerage account through Robinhood and I’ve been slowly buying SPY (~25% of my portfolio) as a long-term ETF. I’ve recently come to learn that VOO may be better for “set and forget”. Would it be better to continue buying SPY or make the switch?