03/08/2021 What’s in Your Core?

By Herb Blank

If you are an investor with less than $1 billion to invest and a holding horizon of more than 3 months, do NOT buy SPY to access exposure to the S&P 500.  This is true even though SPY has the most assets under management and the highest average trading volume by far. The simple fact is that there are more advantageous alternatives to gain access to US market exposure.  Read on for the numbers and detailed discussion on better alternatives.

The overall strategy most institutions and financial advisors employ for equity allocation is called “core-satellite.”  The core usually comprises at least 40% and often up to 60% or more of the overall equity exposure, which in turn is generally between 50% – 70% of the overall plan. Financial advisors will ratchet the individual’s equity exposure down as clients age, but generally it is the tactical satellite funds that get liquidated first.  Then the core starts getting reduced. For most US investors following the core-satellite model, the core is a fund based upon a broadly diversified index or a fund that is benchmarked to such an index.  

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The investment media generally ignore US equity core ETFs. The tactically deployed satellite ETFs generally make better stories.  These include thematic ETFs, leveraged ETFs, style ETFs, international theme/country ETFs, ESG ETFs, impact ETFs and new ETFs. The high and low performers for the year are almost certainly going to come from one of these segments. They have strategies, anticipate future environments, and vary widely in fees.  On the other hand, they consider core ETFs boring and a race to zero.

However, the assets under management in all three segments put together are lower than those in core index ETFs.  The main reason for this is prudence. Buying US equity market exposure through index ETFs has produced better after-tax and after-fee returns for the past 1,3,5,10 and 20 years relative to the vast majority of mutual funds. 

The most common core index used by investors to capture US Equity Exposure is the S&P 500 Index, so this is where I’ll start.  The three largest S&P 500 ETFs are:

  1. SPY by SPDRs, the State Street Global Advisors (SSgA) ETF Family
  2. IVV by iShares by BlackRock
  3. VOO by Vanguard ETFs, 

Research Reports on each of these ETF’s are available here:


SPY has the most AUM at about $400 Billion at 2020 year end, as opposed to $230 Billion for IVV and $177 Billion for VOO.  Certainly all three are huge enough for most investors.

The most frequently advanced argument for SPY is that it has by far and away from the highest daily dollar trading volume and the shortest interest. Hedge funds that trade daily find the differences just discussed irrelevant. They need to make their trades without moving the market price so they may well be better served by SPY. However, as ETF.com just documented,  through stealth trades in both IVV and VOO using very large sized redemptions and creations presumably for tax-related purposes, there is more than enough liquidity in each for almost all other purposes. Since most investors can use discount brokers to trade without fee charges and will certainly not impact the market with their trades, my advice is to buy IVV and VOO.  But not SPY.  

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As always, I recommend downloading the ETF Fact Sheets and summary prospecti for yourself, as well as the ValuEngine reports on each. There you will find the following major differences between SPY and both IVV and VOO:

  1. SPY uses a now-archaic structure based on a Unit Investment Trust model because the fund model used today had not yet been approved by the SEC. It has a Trustee, not a Portfolio Manager, and as such is not able to reinvest dividends, lend securities or use futures tactically to minimize costs. 
  2. The expense ratio is 0.095% as compared with 0.03% for IVV & VOO; meaning that about 6-1/2 bp of the difference comes from the fee differential and 5-1/2 bp from the structural differences and management skills of the Blackrock and Vanguard teams.
  3. The annualized total returns are lower for SPY by about 12 basis points (0.12%) per year in each time frame.

Here is a table of annualized returns for 1- 3- 5- and 10-year periods ending 12/31/2020. The differences are systematic.  For any period, SPY will always underperform IVV and VOO by about 12 basis points.


ETF 1-Year Ann. Tot. Ret. 3-Year Ann. Tot. Ret. 5-Year Ann. Tot. Ret. 10-Year Ann. Tot. Ret.
SPY 18.23% 14.02% 15.04% 13.74%
IVV 18.35%  14.14% 15.18% 13.85%
VOO 18.35%  14.14% 15.18% 13.85%

Research Reports on each of these ETF’s are available here:


Now, what is the big deal about 12 basis points, less than 1/8 of 1%? Suppose these had existed 30 years ago in 1991 (they didn’t) and you had started with $10,000 and added $100 per month until retirement at the end of last year and that the 30-year annualized rates of return were the same as the 10-years returns. By 2020, you’d have close to one million dollars either way.  However, you’d have $963,000 with IVV/VOO as compares with $938,000 with SPY, a difference of $25,000.  At retirement, you’d probably prefer to have the $25,000 in your account than having been eaten up by avoidable frictional costs. 

For those who may prefer to stay within the SPDR family, you may wish to consider SPLG which switched in January from using an SSgA index to the S&P 500. SPLG also uses the modern ETF fund structure and also has a fee of 3 basis points.  Therefore, going forward, the results should be the same as with IVV and VOO with the warning that large investors might not find the daily liquidity they need with the much smaller SPLG until the fund grows substantially in assets.

Please note that the advice to avoid buying SPY applies to new shares. If you already own SPY, it is important to first evaluate your tax situation before selling because capital gains will be realized, and wash sale rules may apply to replacing SPY with another S&P 500 ETF such as IVV or VOO. Consultation with your advisor and/or your accountant is highly recommended.

All that said, what’s the bottom line for new purchases? Between iShares by Blackrock’s IVV and Vanguard’s VOO, which should you use to buy an S&P 500 Index ETF?  The answer is either. Both tie for the best.  For most small investors, either IVV or VOO should be sufficient for getting efficient core large cap equity exposure.

However, not everyone may be satisfied with the S&P 500 as her or his US core. Indeed, most state pension funds and other large investors think of the S&P 500 as a larger cap index that is too concentrated and narrow to represent the US stock market at their core.  Even some individual investors including yours truly take this approach. 

The concentration issue is a special concern now when the top three holdings in the S&P 500 today constitute about double the weight that they did in 2011. The runaway return dominance by Apple, Facebook, Amazon, Google, Microsoft and Netflix has made many investors so concerned about this concentration, many are predicting a precipitous step decline as with the bursting of the tech bubble in 2000.

Happily, there are three core ETFs that included large-cap, midcap and small-cap US stocks. The three largest are: Vanguard Total Market, VTI; iShares Russell 3000, IWV, and SPDR S&P 1500 Total Market, SPTM.  I recommend downloading the ValuEngine reports for all three, then comparing them to the ValuEngine IVV report.  Again, pulling down the summary prospecti and fact sheets before investing is always a good idea.

IWV is the oldest of the three ETFs used to represent the total US market.  It follows the Russell 3000 Index, the oldest and most prevalent core benchmark for large institutional portfolios. As with SPY, the oldest ETF in the category also has the highest expense ratio, a whopping 20 basis points, and historical structural issues. This time the latter is not with the fund itself which uses the modern ETF structure but with the index.  The Russell 3000 contains the largest 3000 US-domiciled stocks and until very recently was rebalanced annually in June.  Merged or delisted stocks were not being replaced until rebalancing, often reducing the index to less than 2800 stocks at June rebalancing. The most deletions during this period came from the bottom 2000, increasing the weight of the top 1000, and that was not reset until rebalancing and reconstruction. Also because of its prevalence in institutions and the mechanical nature of the rebalancing, traders frequently gamed the process, buying and selling ahead of the rebalancing, often to the expense of fundholders. 

VTI tracks the CRSP total market index.  4,000 constituents across mega, large, small and micro capitalizations, representing nearly 100% of the U.S. investable equity market, comprise the CRSP US Total Market Index. It is reconstituted and rebalanced quarterly.  VTI tracked an MSCI index somewhat analogous to the Russell 3000 at inception but Vanguard commissioned CRSP to build what both parties considered a better index for total market exposure.  It uses mathematically sophisticated and fully disclosed methodologies to achieve this goal, excluding certain stocks in the Russell 3000 that do not meet their criteria while going deeper into the market cap spectrum including a selection of relatively liquid microcaps. VTI accomplishes all this with an expense ratio identical to VOO, just 3 basis points.

SPTM tracks the S&P Composite 1500® Index.  The index is designed to measure the performance of the large-, mid-, and small-capitalization segments of the U.S. equity market. The Index consists of those stocks included in the S&P 500®  Index, the S&P MidCap 400® Index, and the S&P SmallCap 600® Index as selected by the Index Committee. With just 1000 smaller stocks, SPTM is a bit more “top-heavy” than IWV or VTI.  SPDR offers SPTM at the same fee as VTI, just 3 basis points

Repeating the table for the broader market indexes for period ending 12/31/2020

ETF 1-Year Ann. Tot. Ret. 3-Year Ann. Tot. Ret. 5-Year Ann. Tot. Ret. 10-Year Ann. Tot. Ret.
IWV 20.66% 14.29% 15.24% 13.60%
VTI 20.95%  14.49%  15.43%  13.78%
SPTM 17.97% 14.14% 15.18% 13.85%

Research Reports on each of these ETF’s are available here:


Now let’s dig deeper into the concentration issue by pulling up the ValuEngine reports.  The top 10 holdings are identical to those of the S&P 500.  Since all of these indexes are float-adjusted market-cap weighted, they are very concentrated in their top holdings and technology as well, just a bit less so.  While the top 10 comprise 27.2% of VOO, IVV and SPY, they are lower in SPTM, IWV and VTI: 24.9%, 22.7%, 21.9% respectively. The reports also show that the highest weights in all three are still Computers and Technology.  The S&P 500 funds have 31.6% in tech while SPTM, IWV and VTi contain 30.2%, 30.0% and 29.9% respectively.  The differences correlate very strongly with the number of holdings in each of the three total market ETFs.  At 2020 year end, the counts were: SPTM 1500; IWV 2864; VTI 3634.  The differences are how deeply each underlying index delves into the market cap spectrum.  

How about the bottom line, what are the differences in returns? As with everything investments it depends on the time period.  Among all 6 ETFs, the best performer in the 1-, 3-, 5-year periods was VTI, also outperforming the S&P 500 ETFs in those three time periods, almost all of it coming from 2020.  However, SPTM was the top performer in the 10-year period tying that of IVV and VOO.  Perhaps the most important lesson taken from these data is the consistency of the underperformance of IWV relative to VTI, most of it attributable to the difference between a 20 basis point expense ratio and a 3 basis point expense ratio.  Using our earlier example, in 30 years under the same conditions, the differential in returns would be $33,000.  Conclusion: in core index ETFs, the most important differentiator is the expense ratio.

Here is a report on VTI.  ValuEngine reports on all of the other ETF’s discussed in this post are available on www.ValuEngine.com

210308 VE report VTI

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