A seismic shift is currently underway among the world’s largest exchange-traded funds (ETFs), which could redefine the landscape of the world of ETFs.
THE SPDR S&P 500 ETF Trust (NYSE: SPY), the world’s largest ETF with over $500 billion in assets under management, has seen significant outflows since the start of the year.
In contrast, its lower-cost peers, particularly the Vanguard S&P 500 ETF (NYSE: VOO), has seen an influx of investments.
What is driving this trend?
SPY ETF outflows are on the rise
THE SPDR S&P 500 ETF Trust There have been capital outflows totaling $28 billion since the start of the year, according to Vettafi data.
This change is notable because it occurs against a backdrop where the U.S. stock market is rising, indicating that the performance of the underlying investments is not the cause of capital outflows.
The main factor driving this change appears to be the cost associated with managing these funds, rather than their performance.
SPY has an expense ratio of 0.09%, significantly higher than some of its direct competitors. Even a few basis points can make a significant difference in investor returns over time, especially for institutional investors or very large individual investors.
Chart: SPY ETF Witnesses $28 Billion Year-To-Date Outflows
Lower cost entry to peers
While SPY has experienced outflows, the Vanguard S&P 500 ETF welcomed inflows of $33 billion during the same period. Another competitor, iShares Core S&P 500 ETF (NYSE: IVV), attracted $14.53 billion.
These ETFs track the same index as SPY and have almost identical portfolios.
The distinguishing factor lies in their expense ratios: the Vanguard S&P 500 ETF and the iShares Core S&P 500 ETF only charge 0.03%, compared to 0.09% for SPY.
Chart: VOO ETF sees over $33 billion in inflows year-to-date
Read also: 5 Things You Need to Know About Vanguard ETFs: Why There Are No Bitcoin ETFs in Their Lineup?
Should you switch from SPY to VOO?
Although a 0.06% difference in expense ratios may seem negligible, it becomes significant with larger investments or over extended periods.
For example, on a $10,000 investment, choosing VOO over SPY saves the investor $6 per year. However, for a $10 million investment, the annual savings jump to $6,000.
To illustrate the long-term impact, consider the example of an investor who starts with a $100,000 investment in an S&P 500 fund. Assuming an average annual return of 7%, after 20 years this investment would at $384,803 with VOO, compared to $380,509 with SPY, due to the difference in expense ratios.
Over time, these seemingly small differences can lead to substantial divergences in final wealth, due to the effect of compounding returns.
Thus, for individual investors, especially those with large amounts or long investment horizons, the cost savings of ETFs coupled with lower expense ratios should not be overlooked.
If someone were considering a change…
