SPY Set To Lose Its Crown

Since 2017, the King of the Exchange Traded Fund world has slowly been losing ground to its closest competitors.

The SPDR S&P 500 ETF Trust (SPY), the undisputed ETF King since ETFs became popular, is set to lose its crown within the next few years. Well, perhaps it would be better to say that it will lose one of its crowns or maybe one of its world titles while still holding a few others. Let me explain...

The SPY ETF is and has been, with the exception of just a handful of months over the last 20-plus years, the largest Exchange Traded Fund in terms of assets under management. Currently, SPY has $365 billion under management.

In contrast, the next closest competitor, iShares Core S&P 500 ETF (IVV), has $298 billion, and then there is the Vanguard S&P 500 ETF (VOO) at $264 billion in assets.

The SPDR ETF has more than $65 billion in assets compared to the second largest ETF and more than $100 billion compared to the third largest ETF. So why are there predictions that its competitors will overtake it in the coming years?

First and foremost, since 2017, it has been losing ground to IVV and VOO, and based on results from the first half of 2022, the trend doesn't appear to be changing. VOO has added $29.2 billion in assets year-to-date, while IVV has added $15.7 billion. On the other hand, SPY has lost $22.7 billion.

Also, it is essential to remember that these three ETFs we are comparing all due literally the same thing, track the S&P 500's performance.

It is not as if we are comparing a NASDAQ-focused ETF and a S&P 500 ETF, these three funds are all built the same. They own the 500 stocks that make up the S&P 500 based on a market capitalization weighting. That matters because this shows that the three fund's asset changes are not based on performance but on investor preference showing that they are pulling money from one fund in mass and adding it to the others.

Why is this shift occurring?

Simple! Cost.

Despite being the undisputed King of the ETF world, the SPY has one chink in its amour; it is expensive compared to the competition. Like really expensive. The SPY charges a 0.09% expense ratio. So in dollar terms, that would mean an investor with $10,000 in SPY pays $9.00 per year.

But IVV and VOO only charge 0.03% or $3.00 for every $10,000 invested. SPY is three times as expensive as the competition, which offers a nearly identical product. It makes no sense for long-term buy-and-hold investors to stick with SPY and pay the higher fee.

As for other types of investors, say those who trade or put on hedged positions or different complicated investing strategies, it does still make sense why they would use SPY instead of the alternatives. SPY still has the best liquidity.

The current average daily volume for SPY is 93 million shares trading hands per day. IVV's average volume is 6.2 million, and VOO's is 5.6 million. Even these figures back the thesis that long-term buy-and-hold investors are buying IVV and VOO while traders are trading SPY.

Traders don't care as much about the higher cost when they have access to the type of liquidity SPY offers, allowing them to quickly and seamlessly get in and out of a position. This is why SPY may lose its crown as King of the ETFs from an asset standpoint.

Still, it will not likely lose its title as the most liquid ETF because while the competition may be within striking distance from an asset under management standpoint, they aren't even in the same ballpark when it comes to average daily volume.

So if you are an investor in SPY, you need to ask yourself why. Do you need the liquidity, or have you just been complacent and not switched to one of the ETFs more suited for your type of investing?

Matt Thalman
INO.com Contributor
Follow me on Twitter @mthalman5513

Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.