Does Vanguard or State Street Have the Better S&P 500 ETF?

Deciding between the Vanguard S&P 500 ETF (NYSEMKT:VOO) and the State Street SPDR S&P 500 ETF (NYSEMKT:SPY) typically involves weighing the Vanguard fund's lower costs against the SPDR trust's slightly higher trading liquidity and its long-standing history.

The S&P 500 serves as the primary benchmark for the United States stock market, representing 500 of the largest and most influential companies. Investors looking for broad equity exposure often choose between VOO and SPY, two massive funds that track the same index but differ slightly in cost, age, and legal structure.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from monthly returns over the available fund history (up to five years). The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

The Vanguard fund is significantly more cost-efficient for long-term holders with its 0.03% expense ratio compared to 0.09% for the SPDR trust. Both funds offer a matching 1% dividend yield, as they are capturing the same underlying corporate distributions.

Performance & risk comparison

What's inside

The Vanguard S&P 500 ETF employs a full-replication indexing approach to track its benchmark, holding 505 stocks in proportions that mirror the index. Its largest positions include Nvidia Corp (NASDAQ:NVDA) at 7.6%, Apple Inc (NASDAQ:AAPL) at 7.1%, and Microsoft Corp (NASDAQ:MSFT) at 5.4%. Sector weights lean toward technology at 37%, financial services at 12%, and communication services at 10%. The fund was launched in 2010. Vanguard S&P 500 ETF has paid $7.35 per share over the trailing 12 months, which on its recent ~$701.0 share price works out to a 1% yield.

The State Street SPDR S&P 500 ETF is a unit investment trust (UIT), a structure that requires full replication and prevents the reinvestment of dividends between distribution dates. This can result in a slight cash drag during bull markets. The trust holds 504 securities, and its top positions include Nvidia at 7.6%, Apple at 7%, and Microsoft at 5.4%. The portfolio reflects the broader market with technology at 37%, financial services at 12%, and communication services at 10%. The fund was launched in 1993. State Street SPDR S&P 500 ETF has paid $7.52 per share over the trailing 12 months, which on its recent ~$762.6 share price works out to a 1% yield.

For more guidance on ETF investing, check out the full guide at this link.

Which looks like the better buy?

These two fund giants following the S&P 500, the world's largest index, in terms of investable assets that mimic or track it in some form, have a lot of similarities, not unexpectedly.

They have identical market cap weight, with large caps constituting 80% of assets, mid caps 19%, and small caps 1%. They are both just about 99.5% in U.S. stocks, with a small bit in stocks classified as developed-world non-U.S. and emerging markets. Their maximum drawdowns are nearly identical over multiple time frames, too. Their top 10 holdings are identical, as are the amounts of each ETF dedicated to the top 10, which range from 37% to 38%.

So how to choose between these two funds? They are both plenty large,so liquidity is never a problem unless you are among the world's largest investors (I am betting you're not). The simple answer is that Vanguard and its institutionwide emphasis on low cost fund makes the difference here, especially for long-term investors.

Year-to-date, the Vanguard fund VOO is up 10.12%, while the State Street offering SPY is up 10.09%. Interestingly, in brief periods, the index funds can outperform the index because of when they buy and sell and reweight each day, but generally, both ETFs will slightly lag the index itself.

Over the 3-, 5-, and 10-year lookbacks, VOO beats SPY too. VOO has returned 19.29%, 12.82%, and 15.04% annualized. SPY returned 19.19%, 12.76%, and 14.98% over the same 3-, 5-, and 10-year periods.

Does that 0.06 percentage point decade-long performance difference matter? You would have done well with both, but $211.24 better with VOO, which would stand at $40,596.51 after 10 years with an initial investment of $10,000.

Long-term investors should choose the best long-term fund. Typically, that's the one with the lowest costs when compared to a near-identical competitor. Go with Vanguard's VOO.

Brendan Coffey has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.