S&P 500 ETFs Face Off: SPY Versus IVV

The S&P 500 is marching higher, hitting multiple fresh highs amid Washington turmoil, geopolitical risks, decline in oil price and lofty valuation. The benchmark has risen about 9.8% in the year-to-date timeframe buoyed by strong corporate earnings, accelerating economic activity, continued job gains and improving consumer confidence.

The trend is likely to continue in the weeks ahead as hopes of another strong earnings season and the Fed’s gradual tightening path has once again lifted the appeal for riskier assets (read: Dovish Yellen Testimony to Boost These ETFs).

Per the latest Earnings Trends, Q2 earnings for the S&P 500 index are expected to be up 5.6% from the same period last year on 4.5% higher revenues. Five of the 16 Zacks sectors are expected to post double-digit earnings growth with energy being the biggest contributor. However, expected quarterly earnings are 2.1% below the all-time quarterly record logged in Q4 2016.

According to an analysts’ poll on investing.com, the S&P 500 could rally to as much as 2600 by the year-end with a downfall of 2100. Wall Street forecasts the index to go up as much as 2575 or low as 2300.

Given the bullish trend, investors are looking to tap the index in the ETF form. The two ultra-popular ETFs targeting the S&P 500 — SPDR S&P 500 ETF Trust (AX:SPY) and iShares Core S&P 500 ETF IVV — have gained 8.2% so far this year and have a Zacks ETF Rank of 2 or ‘Buy’ rating with a Medium risk outlook (see: all the Large Cap ETFs here).

However, investors reacted differently to both ETFs. This is especially true as SPY (NYSE:SPY) is leading the ETF redemptions list this year with over $8.5 billion in outflows while IVV is the top asset creator, having accumulated nearly $18.1 billion.

While both SPY and IVV look similar in terms of the holdings breakdown, with Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) taking the top two spots, there are few key differences between them. We have spot the differences below and the reasons for IVV’s success:

Expense Ratio

SPY is the most actively traded ETF with average daily volume of around 74 billion and 0.09% in expense ratio. On the other hand, IVV is less liquid, trading in average daily volume of 3.4 billion, which ensures some additional cost in the form of marginal bid/ask spread. However, the iShares version costs just 4 bps in annual fees, 55% less than the State Street product. The low fee has attracted investors to IVV.

Growing Assets

With AUM of $116.5 billion, IVV is a lot smaller than $236 billion SPY. Looking at this in percentage terms to net asset value, IVV seems to be increasing its assets more rapidly. In fact, IVV crossed the $100-billion AUM mark in early March from $65 billion in early March 2016 (read: Large Cap ETF Tops $100 billion in AUM).

Structure

Being the oldest U.S. equity ETF, SPY is structured as a Unit Investment Trust (UIT) with State Street serving as the trustee. It is therefore not allowed to reinvest dividends paid by underlying holdings, but must hold them in cash until they are scheduled to be distributed to SPY shareholders. Additionally, SPY does not lend out securities from its portfolio to earn extra money. Meanwhile, the iShares S&P 500 ETF does not have such restriction and can lend out shares to earn extra. IVV also reinvests dividends in the index until paid out quarterly, thereby increasing returns from the fund.

Bottom Line

A low fee and dividend reinvestment option have made IVV more enticing to investors than SPY.

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Apple Inc. (AAPL): Free Stock Analysis Report

Microsoft Corporation (MSFT): Free Stock Analysis Report

SPDR-SP 500 TR (SPY): ETF Research Reports

ISHARS-SP500 (IVV): ETF Research Reports

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Zacks Investment Research