S&P 500 Back To Above 2,800: SPY ETF Versus IVV

As the bull market turns 10 this week, the S&P 500 climbed back to the 2,800 threshold for the first time in nearly four months and has gained more than 11% so far this year. The strong rally pushed the index to its best start to a year since 1991 (read: Wall Street's Best Start Since 1987: Top ETFs of Top Sectors).

The optimism over the imminent trade deal between the United States and China has bolstered investors’ sentiment. The Federal Reserve also played an important role in driving market sentiments. The central bank said that it will be patient in raising rates, citing mounting risks to the U.S. economy, including slowdown in Chinese and European economies and waning stimulus from the 2018 tax cuts. Additionally, stabilization in oil price and better-than-expected earnings added to the strength.

Further, rising wages, subdued inflation, higher consumer confidence and increasing consumer spending bode well for America’s economy. Moreover, the wave of mergers and acquisitions also led to a spike in the S&P 500.

Given the bullish trend, investors are seeking to participate in the index’s rally with the ETFs that replicate the index. 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 12.2% each so far this year and have a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (see: all the Large Cap ETFs here).

However, both ETFs are leading the redemptions list this year as SPY pulled out nearly $9.5 billion and IVV saw outflows of $6.5 billion. While both SPY and IVV look similar in terms of the holdings breakdown, with Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL) taking the top two spots, there are a few key differences between them. We have spotted the differences below:

Expense Ratio

SPY is the most actively traded ETF with average daily volume of around 104.4 million and 0.09% in expense ratio. IVV is less liquid, trading in average daily volume of 5.3 million, 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 (NYSE:STT) product. The low fee will likely attract investors to IVV (read: Guide to the 25 Cheapest ETFs).

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.

Growing Assets

Though IVV with AUM of $160.9 billion is a lot smaller than $263.6 billion SPY, IVV has grown its assets base more rapidly if we go by history. This is especially true given that SPY lost around $16.5 billion in its asset base last year versus $18.5 billion gain for IVV, per etf.com. In 2017, IVV is the top asset accumulator, having gathered $30.2 billion in AUM while SPY has pulled in just $10.6 billion (read: Loved and Hated ETF Areas of February).

Bottom Line

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

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