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S&P 500 ETFs Face Off: SPY vs. IVV

Sweta Killa

The S&P 500 exited the bear market, having gained nearly 23% from its Mar 23 low though volatility remained high. According to Bespoke Investment Group, coronavirus stock-market volatility has resulted in the biggest daily price swings since 1929 crash as the S&P 500 Index saw historic average daily price change of up or down 4.8% over the last five weeks.

The latest gain came amid signs of stabilization in coronavirus infections, indicating that social distancing and stay-at-home initiatives are helping to control the spread of the virus. Per the new report from the University of Washington's Institute for Health Metrics and Evaluation, the estimated death toll from the coronavirus pandemic in the United States has been lowered by 26% from 82,000 to 60,000 over the next four months. The hospitalizations related to the COVID-19 pandemic are beginning to plateau in some of the hardest-hit areas of the country (read: 5 Sector ETFs at the Forefront of Wall Street Rally).

Further, the suspension of Sen. Bernie Sanders presidential campaign added to the strength. Moreover, the surge in oil price on the hopes of a truce in the Saudi-Russian oil price war and China buying crude also led to the spike in the stocks. The latest developments indicate that the fundamentals are improving slowly, thereby paving the way for a bullish stock market.

Apart from this, the large fiscal and monetary stimulus is expected to provide a boost to the economy that will benefit the stocks. The House of Representatives approved a historic $2.2 trillion stimulus package to rescue the economy ravaged by the coronavirus. After slashing interest rates to near zero and offering to buy more government bonds and mortgage-backed securities as needed to support smooth market functioning, the Fed has vowed to lend against student loans and credit card loans, as well as back the purchase of corporate bonds and direct loans to companies. This represents the most extreme intervention in the economy by the central bank in its history of more than 100 years (read: ETFs to Gain as Wall Street Cheers US Stimulus Package).

As such, investors are looking to tap the index in the ETF form. The two ultra-popular ETFs targeting the S&P 500 — SPDR S&P 500 ETF Trust SPY and iShares Core S&P 500 ETF IVV — have gained more than 11% in a week and have a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

Both ETFs saw asset inflows to start this month. This is especially true as SPY has been the top asset creator, having accumulated more than $5.1 billion while IVV has pulled in $787 million in capital so far in April. However, from a year-to-date look, SPY tops the redemption list, with outflows of $8.2 billion while IVV has accumulated $4.8 billion in its assets (see: all the Large Cap ETFs here).

While both SPY and IVV look similar in terms of the holdings breakdown, with Microsoft MSFT and Apple 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 108.7 billion and 0.09% in expense ratio. On the other hand, IVV is less liquid, trading in average daily volume of 6.2 billion, 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 product.

Growing Assets

Though IVV with AUM of $168.5 billion is a lot smaller than $249 billion SPY, it has grown its assets base more rapidly if we go by history. This is especially true given that SPY lost around $2 billion and $16.5 billion in its asset base in 2019 and 2018 respectively versus respective capital inflows of $8.6 billion and $18.5 billion 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: Guide to 10 Most-Heavily Traded 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, 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.

Bottom Line

A low fee and dividend reinvestment option makes IVV attractive to investors while high trading volume makes SPY enticing as it is easy to buy and sell large amounts of SPY without incurring extra cost.

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