By Herb Blank<\/p>\n
If you are an investor with less than $1 billion to invest and a holding horizon of more than 3 months, do NOT\u00a0buy\u00a0SPY to access exposure to the S&P 500.\u00a0 <\/strong>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.\u00a0 Read on for the numbers and detailed discussion on better alternatives.<\/strong><\/span><\/p>\n The overall strategy most institutions and financial advisors employ for equity allocation is called \u201ccore-satellite.\u201d\u00a0 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\u2019s equity exposure down as clients age, but generally it is the tactical satellite funds that get liquidated first.\u00a0 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.\u00a0\u00a0<\/span><\/p>\n Subscribers to ValuEngine.com log in HERE<\/a> to access reports on all ETFs mentioned below.<\/p>\n The investment media generally ignore US equity core ETFs. The tactically deployed satellite ETFs generally make better stories.\u00a0 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.\u00a0 On the other hand, they consider core ETFs boring and a race to zero.<\/span><\/p>\n However, the assets under management in all three segments put together are lower than those in core index ETFs.\u00a0 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.\u00a0<\/strong><\/span><\/p>\n The most common core index used by investors to capture US Equity Exposure is the S&P 500 Index, so this is where I\u2019ll start.\u00a0 The three largest S&P 500 ETFs are:<\/span><\/p>\n Research Reports on each of these ETF\u2019s are available here:<\/strong><\/p>\n http:\/\/www.valuengine.com\/rep\/mresearch_report<\/a><\/strong><\/p>\n 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.\u00a0 Certainly all three are huge enough for most investors.<\/span><\/p>\n 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,\u00a0 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.\u00a0 But not SPY.\u00a0\u00a0<\/span><\/p>\n Financial Advisory Services based on ValuEngine research available through:\u00a0\u00a0<\/strong>www.ValuEngineCapital.com<\/a><\/strong><\/p>\n 2020 performance now available for 5 portfolios.<\/p>\n 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:<\/span><\/p>\n Here is a table of annualized returns for 1- 3- 5- and 10-year periods ending 12\/31\/2020. The differences are systematic.\u00a0 For any period, SPY will always underperform IVV and VOO by about 12 basis points.<\/span><\/p>\n <\/p>\n\n
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