If you invested $1 million in either SPY or VOO and held it for 10 years, the difference in your returns would likely be relatively small, but VOO would likely outperform SPY due to its lower expense ratio
. Here's a breakdown of why:
1. Expense Ratios:
- VOO has a lower expense ratio of 0.03%, while SPY has a higher expense ratio of 0.09%.
- This seemingly small difference can compound over time, especially with larger investments like $1 million.
- Over 10 years, this difference would result in VOO costing you approximately $6,000 less in fees on a $1 million investment (assuming no growth).
2. Historical Performance:
- Both SPY and VOO track the S&P 500, so their returns are very similar historically.
- However, VOO's lower expense ratio gives it a slight edge in performance.
- For example, over the past 10 years, SPY has had annualized average returns of 12.24%, compared to 12.29% for VOO, according to Stock Analysis.
- This 0.05% difference might seem insignificant, but it can add up over a 10-year period, especially on a $1 million investment.
3. Estimated Difference:
- Assuming a hypothetical 7% average annual return, the difference in fees between SPY and VOO on a $1 million investment over 10 years could result in a performance gap of over $15,000, according to Cheddar Flow.
- This is a rough estimate, and the actual difference could be higher or lower depending on the market's performance over the next 10 years.
4. Other Factors:
- Structure: VOO is structured as an open-ended ETF, allowing it to reinvest dividends internally and potentially enhancing its tax efficiency, according to ETF.com.
- SPY is structured as a Unit Investment Trust (UIT) and cannot reinvest dividends directly within the fund.
- Liquidity: SPY has a higher trading volume, making it more liquid than VOO. This may be a consideration for very active traders but is generally less important for long-term buy-and-hold investors.
In Conclusion:
For a long-term investor with a $1 million investment, VOO is generally the better choice due to its lower expense ratio and potential for slightly higher returns. While the difference in returns might not be dramatic, it can compound over time and result in a noticeable difference in the final value of your investment.
