Better S&P 500 ETF: VOO vs. SPY

The S&P 500 makes investing simple. The famous stock market index offers instant exposure to roughly 500 of America's biggest public companies. Because the S&P 500 is an index, you can't invest in it directly, but you can buy shares of the exchange-traded funds (ETFs) that track it.

Does it really matter which S&P 500 ETF you buy? It can.

The Vanguard S&P 500 ETF (NYSEMKT: VOO) and the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) are two of the most popular choices, and might be the two most famous stock market ETFs of all. Although they are very similar, there are some differences between the two that can steer investors toward one or the other.

Here's what each ETF is best at, and why Vanguard's S&P 500 ETF makes a little more sense for most investors.

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The oldest U.S. ETF makes more sense for traders

You could consider the SPDR S&P 500 ETF Trust the old-school stock market ETF. Listed in January 1993, it's the oldest ETF in the United States. While it's no longer the world's largest fund by market cap -- it's been surpassed by the other ETF in this article -- it is the world's most actively traded ETF, with approximately 64 million shares moving each day.

All that market activity makes the SPDR S&P 500 ETF Trust highly liquid. Traders can buy and sell it easily, with narrow bid-ask spreads, because there are always plenty of buyers and sellers. The ETF is ideal for those who buy or sell options, as well as for active traders.

ETFs typically charge expense ratios. These annual fees compensate the companies managing the fund. The SPDR S&P 500 ETF Trust's expense ratio is just 0.0945%, which translates to only $9.45 for every $10,000 invested. That's a relatively small fee for exposure to the world's most proven long-term wealth-building market index.

Vanguard's S&P 500 ETF stands out for its brand and low fees

The Vanguard S&P 500 ETF is relatively new, listed in September 2010. The Vanguard Group is an iconic fund management company, with a rich history. Its founder, John Bogle, is famous for creating the first mutual fund available to individual investors. It's safe to say that the Vanguard S&P 500 ETF appeals to Bogle's spirit, as it's an ideal ETF for individuals to buy and hold.

For instance, it has a minimum investment of just $1, and its expense ratio is virtually nothing at just 0.03%. That's just $3 on $10,000 invested, less than a third of what the SPDR S&P 500 ETF Trust charges. A few dollars doesn't seem like much initially, but that spread can compound into hundreds, or even thousands, of dollars over a few decades.

Vanguard's name recognition, combined with the ETF's low fees, has made the Vanguard S&P 500 ETF very popular. It's now the largest ETF by market cap at almost $1 trillion. If you're someone who simply wants to add money to your portfolio and buy into the S&P 500 when you can -- and you don't have any interest in day trading or options, where that liquidity could really matter -- the Vanguard S&P 500 ETF is hard to beat.

The Vanguard S&P 500 ETF is the better choice for more investors

It's hard to go wrong with either ETF. Ultimately, the Vanguard S&P 500 ETF is the winner because it's the better ETF for a broader range of investors than its counterpart.

Most individual investors aren't trying to make a living trading stocks or options. Their trades aren't frequent or large enough that saving a few pennies per share on smaller bid-ask spreads would matter. For most, steadily buying and holding an S&P 500 ETF over a few decades is the best way to build wealth. In that case, you'll want to go with the Vanguard S&P 500 ETF.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.