Friday, August 19, 2016

My Favorite S&P 500 Index Funds

Index Funds are great for Passive Investors because they are normally low cost and follow a specific Index or Benchmark. They also don't require any on-going monitoring or active management from the investor. An investor can essentially buy an Index Fund, turn-on auto re-investment of dividends, and forget it for the next 10 to 20 years. I believe they can be great for tax-deferred retirement accounts due to very long investment horizon and low cost for on-going investment of regular contributions such as from a paycheck.

See my introductory post on Index Funds here: Intro to Index Funds 

When investing in Index Funds, I go with the biggest names in S&P 500 Index ETFs such as SPDR SPY, Vanguard VOO, and iShare IVV. All three have tens of billions of dollars in AUM (Asset under Management) and are considered some of the best low cost S&P 500 Index ETFs. 

Why invest in S&P 500 Index? Well, it is one of the easiest ways for an average Joe to invest in stock market and be able to take advantage of long term growth and compounding. Just to give you an idea, a $10,000 invested in a S&P 500 Index in 1996 would be worth $35,559 today with dividends re-invested. That's a total return of 255% without investor doing anything. Just imagine what that $35,000 new BMW in 1996 would have cost you today in terms of opportunity cost.




SPDR SPY ETF is the most popular fund on the planet. It is also one of the biggest and oldest S&P 500 Index Funds with Net Assets around $200 billion and inception date going back to 1993. It follows a somewhat restrictive Unit Investment Trust (UIT) structure which is to ensure the ETF follows its underlying Index with near perfection. This however, also restricts the ETF from re-investing the dividends paid by the underlying securities and instead it must hold the dividends in cash till they can be distributed to the fund's share holder at the end of the quarter.  

Vanguard VOO ETF offers the lowest expense of the group from the company that pioneered the S&P 500 indexing. It uses a unique and patented Share Class structure which provides investors enhanced tax efficiency. It is smallest of the three funds in terms of net assets, but still over $50 billion.

iShares IVV ETF follows an open-end structure which gives more flexibility to the portfolio manager. This is also why it's turn-over rate is higher than the other two ETF funds. On the flip-side, the open-end structure allows the portfolio manager to generate additional income by immediately investing dividends, and even lend out portfolio securities to generate additional income.

For the three ETFs mentioned above, here is the Morning Star Return, Risk, and Rating Statistics:


















As for the expense ratio, Vanguard’s VOO has the lowest net expense when compared to the other two ETFs. This is not surprising given Vanguard’s popularity for providing lowest cost index funds. But the other two are not that far off either when compared to the Average cost of such funds to be around 0.33%.




Below are the top ten holdings within the S&P 500 Index which represents some of the biggest market cap companies across a diversified group of industries:


It's a tough choice given all three ETFs are very similar as they all follow the same Index. However, if I were to pick one of these funds, I would pick VOO given its lowest expense ratio and being a Vanguard managed fund. Also, my broker TD Ameritrade offers VOO commission-free which makes owning this fund even cheaper. Alternatively, I could go with IVV which is offered as a commission-free ETF by Fidelity. For me, it really comes down to picking the Index Fund that gives me the lowest overall cost while maximizing my total return over a long period.

Disclaimer: Author of this article is not a licensed/registered financial or investment advisor and does not provide investment advice. This article is for informational purpose only. Please use your own judgment or seek a licensed financial advisor before investing. You, the reader, bear responsibility for your own investment and financial decisions.

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