VOO vs SPY: S&P 500 ETF Comparison

Introduction

If you’re new to investing, you’ve probably heard about the S&P 500 – the stock market index that tracks 500 of America’s largest companies. But when you start looking for ways to invest in it, you’ll quickly discover there are multiple options. Two of the most popular choices are VOO (Vanguard S&P 500 ETF) and SPY (SPDR S&P 500 ETF Trust).

This comparison matters because both funds essentially do the same thing – they track the S&P 500 index – but they do it with different costs, structures, and features that can impact your long-term returns. Even small differences in fees can add up to thousands of dollars over decades of investing.

By the end of this guide, you’ll understand the key differences between VOO and SPY, know which one might be better for your situation, and feel confident making your first investment in the S&P 500. We’ll break down everything in simple terms, so don’t worry if you’re completely new to this – we’ve got you covered.

The Basics

What Are ETFs?

ETF stands for Exchange-Traded Fund. Think of an ETF as a basket that holds hundreds or thousands of different stocks. When you buy one share of an ETF, you’re actually buying a tiny piece of all those companies at once. This makes it incredibly easy to diversify your investments without having to buy individual stocks from hundreds of different companies.

Understanding the S&P 500

The S&P 500 is like a report card for the American stock market. It includes 500 of the largest, most established companies in the United States – think Apple, Microsoft, Amazon, Google, and Tesla. When people say “the market is up” or “the market is down,” they’re often referring to how the S&P 500 is performing.

VOO and SPY Explained

Both VOO and SPY are ETFs that track the S&P 500 index. This means they both try to match the performance of those 500 companies as closely as possible. If the S&P 500 goes up 10% in a year, both VOO and SPY should also go up about 10% (minus small fees).

VOO (Vanguard S&P 500 ETF):

Created by Vanguard in 2010
Known for extremely low fees
Popular among long-term investors

SPY (SPDR S&P 500 ETF Trust):

Created in 1993, making it the oldest S&P 500 ETF
Higher trading volume
Popular among both investors and traders

How This Fits Into Your Investment Strategy

S&P 500 ETFs like VOO and SPY are often recommended as core holdings in investment portfolios because they provide instant diversification across the largest American companies. They’re perfect for beginners because you don’t need to research individual companies or worry about picking winners and losers.

Step-by-Step Comparison Guide

Step 1: Compare the Costs (5 minutes)

The most important difference between VOO and SPY is their expense ratios – the annual fee you pay to own the fund.

VOO Expense Ratio: 0.03%
SPY Expense Ratio: 0.09%

What does this mean? For every $10,000 you invest:

VOO charges $3 per year
SPY charges $9 per year

While $6 might not seem like much, this difference compounds over time. On a $10,000 investment over 30 years, this could mean hundreds of dollars in additional costs with SPY.

Step 2: Look at Trading Volume (3 minutes)

Trading volume refers to how many shares are bought and sold each day. Higher volume generally means:

Easier to buy and sell shares
Tighter bid-ask spreads (lower trading costs)
Better liquidity

SPY: Typically trades over 50 million shares daily
VOO: Typically trades 3-5 million shares daily

Both have more than enough volume for typical investors, but SPY wins here.

Step 3: Consider Dividend Treatment (2 minutes)

Both funds pay dividends quarterly, but they handle them slightly differently:

VOO: Pays dividends in cash directly to your account
SPY: Also pays cash dividends, with similar timing

The difference here is minimal for most investors.

Step 4: Check Your Broker’s Fees (5 minutes)

Many brokers now offer commission-free ETF trading, but it’s worth checking:

Fidelity, Charles Schwab, TD Ameritrade, and E*TRADE offer both VOO and SPY commission-free
Some brokers might offer additional perks for trading their own funds

Step 5: Review Performance History (3 minutes)

Since both funds track the same index, their long-term performance should be nearly identical, with VOO having a slight edge due to lower fees. Any short-term differences are usually due to tracking errors, which are minimal for both funds.

Tools You’ll Need:

Computer or smartphone with internet access
A brokerage account (Fidelity, Charles Schwab, etc.)
About 20 minutes to complete this comparison

Common Questions Beginners Have

“Isn’t a more expensive fund better quality?”

Not necessarily. With index funds like these, you want the fund that most accurately tracks the index with the lowest fees. Both VOO and SPY do an excellent job tracking the S&P 500, so paying more doesn’t get you better performance.

“Which one is safer?”

Both are equally safe from a diversification standpoint since they hold the same companies. However, both carry market risk – if the stock market goes down, both funds will go down too. Neither is FDIC insured like a savings account.

“Should I worry about the fund company going out of business?”

Both Vanguard and State Street (which manages SPY) are massive, well-established companies. Even if something happened to the fund company, the underlying stocks would still belong to shareholders. This risk is extremely low for both funds.

“Can I lose all my money?”

While both funds carry market risk and can lose value, losing everything would require all 500 companies in the S&P 500 to become worthless simultaneously. Historically, the S&P 500 has always recovered from major downturns, though past performance doesn’t guarantee future results.

“How much money do I need to start?”

You can buy fractional shares of both VOO and SPY with most modern brokers, meaning you can start with as little as $1. However, having at least $100-500 to start makes more sense to minimize the impact of any trading fees or account minimums.

Mistakes to Avoid

Mistake 1: Overthinking the Choice

Many beginners spend weeks agonizing over VOO vs SPY when they should just pick one and start investing. The most important step is to begin investing consistently, not to find the “perfect” fund.

How to avoid it: Set a deadline for your decision (like end of the week) and stick to it.

Mistake 2: Focusing Only on Short-Term Performance

You might see that one fund has outperformed the other over the past month or year and think that predicts future performance. With index funds tracking the same index, short-term differences are mostly random.

How to avoid it: Focus on long-term factors like expense ratios and your investment timeline.

Mistake 3: Trying to Time the Market

Some beginners wait for the “perfect” time to buy, hoping to catch the market at its lowest point. This usually results in waiting forever or buying at worse prices.

How to avoid it: Consider dollar-cost averaging – investing the same amount regularly regardless of market conditions.

Mistake 4: Not Considering Tax-Advantaged Accounts

Many beginners invest in taxable accounts when they could be using 401(k)s or IRAs that offer tax benefits.

How to avoid it: Maximize your 401(k) match and consider opening an IRA before investing in taxable accounts.

Mistake 5: Panic Selling During Market Downturns

When the market drops 20% or more, many new investors sell their funds, locking in losses and missing the eventual recovery.

How to avoid it: Understand that market volatility is normal and have a long-term perspective.

Getting Started

First Steps to Take Today

1. Open a brokerage account if you don’t have one. Popular beginner-friendly options include:
– Fidelity
– Charles Schwab
– Vanguard
– E*TRADE

2. Decide your initial investment amount. Start with whatever you’re comfortable with – even $50 is fine.

3. Choose between VOO and SPY. For most beginners, VOO’s lower fees make it the better choice for long-term investing.

4. Set up automatic investments if possible. Many brokers allow you to automatically invest a set amount monthly.

Minimum Requirements

Age: 18+ (or a custodial account if younger)
Money: As little as $1 with fractional shares
Account: A brokerage account
Time: 30 minutes to set up everything

Recommended Resources

Broker websites: All major brokers have educational resources about ETF investing
Vanguard Investor Education: Free courses on investing basics
SEC.gov: Official government resources on ETF investing
Morningstar.com: Independent fund research and analysis

Next Steps

Advancing Your Knowledge

Once you’re comfortable with your first S&P 500 ETF investment, consider learning about:

1. Asset allocation: How to balance stocks, bonds, and other investments
2. International diversification: Adding global exposure with funds like VTIAX or VEA
3. Tax-loss harvesting: Advanced strategies for taxable accounts
4. Rebalancing: Maintaining your target allocation over time

Building a Complete Portfolio

Your S&P 500 ETF can be the foundation, but consider adding:

International stock exposure (20-40% of stock allocation)
Bond allocation appropriate for your age and risk tolerance
Perhaps a small allocation to small-cap or value stocks

FAQ

Q1: Can I own both VOO and SPY?

Yes, but there’s little point since they track the same index. You’d essentially be paying two sets of fees for the same exposure. Pick one and stick with it.

Q2: Which is better for retirement accounts?

VOO is generally better for retirement accounts due to its lower expense ratio. Since you’ll likely hold these investments for decades, the fee difference compounds significantly over time.

Q3: Do these funds pay dividends?

Yes, both funds pay dividends quarterly, typically in March, June, September, and December. The dividend yield is usually around 1.5-2% annually, though this varies with market conditions.

Q4: Can I switch from SPY to VOO later?

Yes, you can sell SPY and buy VOO anytime, though this might create a taxable event in non-retirement accounts. In retirement accounts like IRAs, you can switch without tax consequences.

Q5: Are there any other good S&P 500 ETF alternatives?

Yes, IVV (iShares Core S&P 500 ETF) has a 0.03% expense ratio like VOO and is another excellent choice. SPLG is even cheaper at 0.02% but has lower trading volume.

Q6: How often should I check my investment’s performance?

For long-term investors, checking monthly or quarterly is plenty. Daily checking often leads to emotional decision-making and unnecessary stress. Set it and forget it is often the best approach.

Conclusion

Both VOO and SPY are excellent ways to invest in the S&P 500, giving you exposure to America’s largest companies with just one purchase. While they’re very similar, VOO’s lower expense ratio makes it the better choice for most long-term investors, potentially saving you hundreds or thousands of dollars over decades of investing.

Remember, the most important step is to start investing consistently, regardless of which fund you choose. Both will help you build wealth over time if you invest regularly and stay the course through market ups and downs.

The key is to begin your investment journey today rather than continuing to research endlessly. Pick the fund that makes sense for your situation, start with whatever amount you’re comfortable with, and gradually increase your investments as your income and confidence grow.

Ready to stay informed about market trends and investment opportunities? Subscribe to our free newsletter for weekly market analysis and investment insights delivered straight to your inbox. Join thousands of investors who rely on our expert commentary to make informed decisions.

—

This article is for educational purposes only and does not constitute financial advice. Always do your own research and consider consulting a licensed financial advisor before making investment decisions.