SPY versus SPY? The world’s biggest ETF clones itself
State Street Global Advisors launched the first-ever exchange-traded fund, in 1993. And with a little-noted move this December, they may be pioneering yet another phase in the evolution of how investors allocate their money.
The fund officially known as the S&P 500 ETF Trust
and colloquially referred to by its ticker, SPY, “was the first and remains the king,” says Todd Rosenbluth, head of ETF and mutual fund research at CFRA. SPY has $300 billion in assets and is known as one of the most liquid funds in the world, not least because it tracks one of investors’ preferred benchmarks, the S&P 500 stock index.
“We want products with purpose,” said Noel Archard, global head of SPDR product for State Street. Archard describes SPY and SPLG as having very different purposes. While SPY, with its mighty weight, is “heavily utilized dynamically by institutions for liquidity purposes,” and occasionally by retail investors taking tactical positions, “some of the features can be less attractive to buy-and-hold investors,” Archard said.
SPY charges a management fee of nine basis points, which might ordinarily seem like a pittance across the broader investment-management spectrum, except that its closest competitors, the iShares Core S&P 500 ETF
undercut it with fees of three and four basis points, respectively. SPY was formally established as a unit investment trust, not an ETF, and thus doesn’t allow holders to reinvest dividends into the fund.
At $320 a share, the more heavily managed SPY seems a lot more “expensive” than SPLG, which costs about $37. “Investor psychology matters,” when it comes to costs, Archard said.
CFRA’s Rosenbluth agreed that fees seem to matter most when investors are comparison shopping. Over the past several years, as a more cost-conscious group of investors stepped into the marketplace, IVV and VOO have captured sizable market share that would likely otherwise have gone to SPY, he said.
“State Street was in a tough position because there’s little reason to cut the pricing of a product that is extremely well-used as a go-to vehicle for investors,” Rosenbluth said. “This step will allow them to support both investor bases, to play in multiple sandboxes at the same time.”
Anora Gaudiano, who works with families and individuals as an adviser with New York-based Wealthspire Advisors, also thinks most of the decision-making among advisers and end-investors comes down to cost. “It’s really a race to the bottom,” she said.
When Gaudiano considers her clients’ portfolios, the decision to invest in low-cost S&P 500 tracker one versus another often comes down to the custodian of the rest of the client’s funds: if he or she already has money invested in a Charles Schwab account, for example, it makes more sense to invest in its fund
But issues like the dividend reinvestment challenges mean “SPY is not our first choice,” Gaudiano said.
Rosenbluth and State Street’s Archard both think investors will see more of this type of move in the future. “The ETF industry is still evolving and maturing,” Archard said. “This is not dissimilar from what we see in the mutual fund space, where they have the same strategy in different share classes. One size doesn’t fit all.”
The December launch follows an earlier State Street move to offer a lower-cost alternative to its popular gold fund.
In 2018, State Street launched the SPDR Gold MiniShares Trust, offering a lower share cost while undercutting GLD’s management fee significantly.
Those kinds of steps are “hard decisions for asset managers to make,” Rosenbluth said. “There is likely revenue lost,” if investors migrate to the lower-fee funds, but the money is not going to competitors.