If you have spent any time researching S&P 500 index funds, you have almost certainly encountered both VOO and SPY. Both track the S&P 500 and hold the same 503 companies in the same market-cap-weighted proportions. Apple, Microsoft, Nvidia, Amazon, and Alphabet sit at the top of each fund, making up roughly a quarter of the total portfolio. From the outside they look identical. So why does the choice matter?
Because a seemingly small difference in annual fees compounds into real money over a long investment horizon — and the two funds are structured very differently under the hood.
The Numbers at a Glance
VOO (Vanguard S&P 500 ETF) launched in 2010, charges a 0.03% annual expense ratio, and holds approximately $500 billion in assets. SPY (SPDR S&P 500 ETF Trust) launched in 1993 — the oldest U.S. ETF still trading — charges 0.0945% per year, and manages approximately $550 billion. The difference in fee rate is 0.0645 percentage points, a number so small it seems irrelevant.
It is not irrelevant. On a $100,000 investment compounding at 7% per year over 25 years, VOO grows to roughly $536,000 after fees. SPY grows to roughly $519,000 over the same period. The fee gap alone costs about $17,000 on a $100,000 starting balance — without adding another dollar. On a $250,000 portfolio the gap approaches $43,000.
How Dividends Work Differently
SPY is structured as a Unit Investment Trust, a legal format dating to 1993. Under this structure, SPY cannot reinvest dividends between quarterly distribution dates. Instead it must hold cash equivalent to accrued dividends, creating a small but real performance drag when markets are rising and that cash could otherwise be compounding.
VOO is structured as an open-end mutual fund and can reinvest dividends immediately into index components. In practice the impact is less than 0.01% per year, but it consistently works in VOO's favor over long time horizons.
When SPY Actually Wins: Liquidity and Options
SPY is the most actively traded ETF in the world, with daily volume regularly exceeding $30 billion. Its options market is the deepest of any ETF, with tight bid-ask spreads across hundreds of strike prices and expiration dates stretching years into the future.
For long-term buy-and-hold investors, this does not matter — you are not trading SPY daily. But if you use options strategies such as covered calls, protective puts, or vertical spreads, SPY's options market offers flexibility that VOO's smaller options market cannot match. Institutional traders and active options investors choose SPY specifically for this reason.
Who Should Buy VOO
VOO is the right choice for the vast majority of individual investors: anyone building retirement wealth in an IRA or 401k, anyone with a horizon of five years or longer, and anyone who buys and holds without trading frequently. The lower expense ratio compounds meaningfully over decades, and the open-end fund structure handles dividends more efficiently.
Who Should Buy SPY
SPY makes sense for investors who use options strategies, day traders who need tight bid-ask spreads in a highly liquid instrument, and institutional investors managing large intraday positions. For anything outside active trading or options, the higher fee is a persistent headwind with no offsetting benefit for the individual investor.
The Verdict
If you are a long-term investor — and most people reading this are — VOO is the better choice. The annual fee advantage compounds into real money over time, the dividend treatment is slightly more efficient, and Vanguard's ownership structure aligns incentives with long-term investors since the fund company is itself owned by its fund shareholders.
The decision is straightforward: use VOO to build wealth over decades. Use SPY if you need the options market or trade actively. For everyone else, every extra dollar paid in fees at SPY is a compounding drag that silently reduces your retirement balance year after year.