Finding the Best S&P 500 ETF: Comprehensive Comparison of Top Picks

Introduction: S&P 500

The S&P 500 is a stock market index tracking the performance of the 500 largest U.S.-listed companies. Launched on March 4, 1957, with a base value date of January 3, 1928, it's one of the most widely followed equity indices.

As a float-adjusted market-cap weighted index, the S&P 500 assigns weights to companies based on their market capitalization, but only considers freely traded shares. This ensures that companies with more publicly available shares have a greater influence on the index's performance.

Managed by S&P Dow Jones Indices, the S&P 500's constituents range from giants with over $3.5 trillion in market capitalization to smaller companies with around $5.6 billion. The median market-cap is approximately $36 billion. The S&P 500 currently includes 503 companies, as the exact number of constituents fluctuates slightly due to periodic adjustments.

Underlying Holdings

Source: https://etfdb.com (as of Sep 12, 2024)

The Technology sector, encompassing Electronic Technology and Technology Services, constitutes 40.3% of the S&P 500 index. Finance and Health Technology follow with the second and third largest exposures at 12.7% and 9.5% respectively. Eight of the top ten holdings in the S&P 500 are technology stocks as you can find in the below table.

Best ETF Candidates

AUM = Assets Under Management; ADTV = Average Daily Trading Volume (# of shares);
A/R = Annualized Return over 5 years; TER = Total Expense Ratio

I selected the 5 best ETF candidates that track the S&P 500 index and compared them across 5 key parameters: (1) AUM: the larger, the better (more reliable), (2) ADTV: the higher, the better (more liquid), (3) Price: the lower, the better (more affordable), (4) A/R: the higher, the better (ETFs tracking the same index should have same returns, but sometimes discrepancies arise, so this serves as a rationality check), and (5) TER: the lower, the better (less costly). I’ve highlighted the best performer in each category in green and the worst in orange to help you quickly identify the differences.

SPY, IVV, and VOO are the three largest ETFs tracking the S&P 500, in that order. Notably, they are also the three largest ETFs overall, which highlights the popularity of S&P 500 index investing. These three, along with SPLG, are essentially the same, with only marginal differences. You might wonder why State Street offers two ETFs tracking the same index. SPY, launched in 1993, has been highly successful, but it comes with a higher expense ratio of 0.09%, whereas IVV and VOO charge only 0.03%. Instead of lowering SPY's expense ratio, State Street introduced SPLG, which offers a lower share price and a reduced expense ratio of 0.02% with an emphasis on the latter.

Meanwhile, the last one, Invesco S&P 500® Equal Weight ETF (RSP), differs from the others. While the S&P 500 and its corresponding ETFs are market-cap weighted - meaning larger companies have a greater influence on the ETF's performance - RSP is equal-weighted. This means each of the 500 companies in the S&P 500 index is given equal weight, resulting in greater diversification. As mentioned earlier, the S&P 500 has 40.3% exposure to the technology sector alone, so its performance is heavily influenced by the largest tech companies. In contrast, the S&P 500 equal-weight index does not have this concentration. The choice between the original market-cap weighted index and the equal-weighted index depends on your investment preference.

Comparison

• Assets under Management: There’s little difference among the top three (SPY, IVV, VOO), while the other two (SPLG, RSP) are significantly smaller but still large enough.

• Daily Trading Volume: SPY is by far the highest, with little difference between the remaining four.

• Share Price: Similar for the top three (SPY, IVV, VOO), while the other two (SPLG, RSP) have lower share prices.

• Annual Returns: Performance is essentially same for the market-cap weighted ETFs (SPY, IVV, VOO, and SPLG), but RSP has lagged over the past 5 years.

• Expense Ratio: SPLG has the lowest expense ratio among the market-cap weighted ETFs, while SPY has the highest. However, RSP has a significantly higher expense ratio at 0.2%.

Conclusion

SPDR Portfolio S&P 500 ETF (SPLG) stands out with its lowest expense ratio and share price. While it has the smallest AUM among the group, its liquidity is reasonably high, with an average daily trading volume exceeding $400 million - more than sufficient unless you're a super-rich individual or an institutional investor trading tens of millions of dollars daily. IVV and VOO are equally strong second choices. Lastly, an investor might consider RSP, an equal-weight ETF, if they prefer less concentration in large-cap stocks and more diversified exposure across all S&P 500 companies, though it’s worth noting the higher expense ratio.

Thanks for reading. I wish you success in making smart investments!

This blog does not offer investment, financial, or advisory services. The information provided herein is for general informational purposes only and should not be interpreted as advice for making specific investment decisions. All investments involve risk, and past performance is not indicative of future results. It is advisable to consult with a qualified financial advisor to determine strategies or products that are appropriate for your individual circumstances. The owner, writer, or operator of this blog accepts no responsibility for any direct or indirect losses that may arise from the use of or reliance on the content presented. The information provided on this blog is subject to change and may not be current. The content is based on personal opinions, as well as information from news sources and research, and may vary due to shifts in personal opinions, financial market conditions, or other influencing factors. Most data referenced is derived from daily closing prices. Data finding, sorting, graphing, and analysis are performed primarily by myself, and while efforts are made to ensure accuracy, errors may be present. If you identify any inaccuracies, please inform me via comments or email, and I will endeavor to review and correct them as necessary. External content or images will be cited to the best of my ability.