Recovering Economy Drives Bets For S&P 500 ETFs

How to Play?

Amid the recovering economy, investors seeking to participate in the S&P 500 Index’s rally can consider ETFs that replicate the index. While these funds look similar in terms of the holdings breakdown with Apple (AAPL - Free Report) and Microsoft (MSFT - Free Report) taking the top two spots and having a Zacks ETF Rank #3 (Hold), there are few key differences between them. We have highlighted the differences below:

SPDR S&P 500 ETF Trust (SPY - Free Report)

Launched in January 1993, SPY is the ultra-popular and the oldest U.S. equity ETF with AUM of $332.7 billion. It is the most actively traded fund with average daily volume of around 69.7 billion and 0.09% in expense ratio. The fund is structured as a Unit Investment Trust (UIT) with State Street serving as the trustee. It is therefore not allowed to reinvest dividends paid by underlying holdings but must hold them in cash until they are scheduled to be distributed to SPY shareholders. Additionally, SPY does not lend out securities from its portfolio to earn extra money.

iShares Core S&P 500 ETF (IVV - Free Report)

With AUM of $254.3 billion, IVV is a lot smaller than SPY and less liquid, trading in average daily volume of 3.8 million. This ensures some additional cost in the form of a marginal bid/ask spread. The fund is the low-cost choice in the space, charging just 3 basis points (bps) in annual fees, 6 bps less than the State Street product. Additionally, the product can lend out shares to earn extra and reinvests dividends in the index until paid out quarterly.

Vanguard S&P 500 ETF (VOO - Free Report)

Though it has a similar structure and expense ratio as that of the iShares product, average daily volume is relatively similar at 3.6 million shares. VOO has amassed $198.9 billion in its asset base.

Leveraged Play: A Short-Term Win

Investors willing to take extra risk could go for leveraged ETFs that track the index. These funds create a leveraged (2x or 3x) long position in the underlying index through the use of swaps, options, future contracts, and other financial instruments. While these funds provide outsized returns in a short span, they could lead to huge losses compared to traditional funds in fluctuating or seesaw markets.

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Disclosure: contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any ...

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