With all these considerations in mind, we’ll start by comparing the total costs of Vanguard S&P 500 ETF (VOO) and SPDR S&P 500 ETF (SPY), the most-traded equity ETF by volume in 2022.3 Both ETFs aim to provide exposure to the stocks listed in the S&P 500 Index and seek to track the index’s performance.
SPY’s expense ratio is 0.0945% (or 9.45 basis points or bps), or more than three times as much as VOO’s expense ratio of 0.03% (or 3 basis points). This is the cost for owning the ETF for one year.
But the average of SPY’s round-trip trading spread of 0.39 basis points is less than half VOO’s round-trip spread of 0.83.4 This, again, is the sum of the trading cost when the ETF is bought and when it’s sold.
At first glance, we can observe two things: There’s a real difference in cost to initiate ownership of these two ETFs, and the magnitude of difference between spread and expense ratio is substantial. That said, integrating the trading costs and the expense ratio means that the break-even calculation—when the cost advantage of VOO’s lower expense ratio starts to kick in—comes in 26 days for a round-trip trade, as the chart below shows.
The chart also shows that VOO’s lower expense ratio shines more and more beyond the point of breaking even. That’s the meaning of the widening space between the two lines. Beyond Day 26 of holding VOO, those cost advantages build and compound over time. In other words, investors can take home increasing amounts holding VOO than they would holding SPY.