Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
So, if you have SPLG /SP500 at ER of 2 bps, do you really need SPY/SP500 at ER of 9.5 bps?
Yes, would say State Street - for higher liquidity for institutions. But retail investors would be just fine with SPLG.
SPY is State Street's original cash cow that may fund its other ETF businesses. State Street wants to have it both ways for a while - low and high ER ETFs for different types of clients.
iShares/BLK used a similar trick years ago when it introduced overlapping low ER ETFs. Sure, those had poor liquidity initially, but all investors wised up and now those newer lower ER iShare ETFs are larger than its older higher ER ETFs.
Remember this when SPLG (AUM $19.9 billion) becomes bigger than SPY (AUM $411.6 billion) in a few years.
SSGA might have a point about SPY appealing to institutional investors.
If it were primarily a matter of cost, then why is SPY still so large? Its ER is more than triple that of IVV ($353B AUM) and of VOO ($334B AUM including all share classes). And that's before including the additional opportunity cost of SPY's cash drag. As a UIT, it cannot put underlying stock divs to work except quarterly, and then only indirectly.
One might rationalize retail investors using SPY based on name recognition, but I expect more informed decisions by institutional investors.
The UIT structure that creates a cash drag also keeps the NAV extremely close to the index value. This is because the UIT can't loan securities and can't "randomly" reinvest stock divs.
[IVV specifically has another source of tracking error: "Because the Fund uses a representative sampling indexing strategy, it can be expected to have a larger tracking error than if it used a replication indexing strategy". (IVV Prospectus.). VOO uses full replication.]
Tracking that is accurate to the nth decimal place doesn't matter for retail, long term investors (or even traders unless their transactions are huge). However,
Because SPY’s net asset value (NAV) always closely mimics the S&P 500 index it is very reliable and suitable for options trading. Without this strict structure, price deviations from the index may disrupt an option strategy. Any strategy depending on the ETF tracking very closely S&P 500 should rely on SPY. Because of that reason SPY is a favorite, relative to IVV for intraday trading. Traders and strategy investors demand no surprises other than what is reflected by the underlying stocks or trading on the ETF.
This gets us back to Yogi's point on liquidity. SPY is highly liquid not only because of its AUM but because of its robust options market, driven in part by its UIT structure. As a "small potatoes" investor, I would not use SPY. But what makes it unappealing to me makes it attractive to institutions.
Yeah. Per stockcharts or Fidelity, FXAIX, VOO, and IVV trade lead places irregularly over 10-5-3-1-0.5y, also the last few months. SPY is always last, slightly.
Comments
Yes, would say State Street - for higher liquidity for institutions. But retail investors would be just fine with SPLG.
SPY is State Street's original cash cow that may fund its other ETF businesses. State Street wants to have it both ways for a while - low and high ER ETFs for different types of clients.
iShares/BLK used a similar trick years ago when it introduced overlapping low ER ETFs. Sure, those had poor liquidity initially, but all investors wised up and now those newer lower ER iShare ETFs are larger than its older higher ER ETFs.
Remember this when SPLG (AUM $19.9 billion) becomes bigger than SPY (AUM $411.6 billion) in a few years.
If it were primarily a matter of cost, then why is SPY still so large? Its ER is more than triple that of IVV ($353B AUM) and of VOO ($334B AUM including all share classes). And that's before including the additional opportunity cost of SPY's cash drag. As a UIT, it cannot put underlying stock divs to work except quarterly, and then only indirectly.
One might rationalize retail investors using SPY based on name recognition, but I expect more informed decisions by institutional investors.
The UIT structure that creates a cash drag also keeps the NAV extremely close to the index value. This is because the UIT can't loan securities and can't "randomly" reinvest stock divs.
[IVV specifically has another source of tracking error: "Because the Fund uses a representative sampling indexing strategy, it can be expected to have a larger tracking error than if it used a replication indexing strategy". (IVV Prospectus.). VOO uses full replication.]
Tracking that is accurate to the nth decimal place doesn't matter for retail, long term investors (or even traders unless their transactions are huge). However, https://wiserinvestor.com/spy-or-ivv-the-sp-500-index-decision/ (2008)
This gets us back to Yogi's point on liquidity. SPY is highly liquid not only because of its AUM but because of its robust options market, driven in part by its UIT structure. As a "small potatoes" investor, I would not use SPY. But what makes it unappealing to me makes it attractive to institutions.
Why 'SPY' is King of Liquidity (ETF.com, 2019)