S Why Investors Should Avoid Buying SPY And GLD

I'll try to make this short and sweet. If you are an investor, do not buy SPY to access exposure to the S&P 500 and most definitely do not buy GLD to access gold. This is a true event though most SPDR ETFs from State Street Global Advisors have the most AUM in their respective categories by far.

The simple fact is that there are more advantageous alternatives to gain access to both targets. Hedge fund traders who use these instruments both long and short can fee free to ignore the rest of this column. Everyone else should investigate my recommendations because I believe it applies universally to all US investors.

Two better alternatives for wealth accumulation to access S&P 500 are IVV offered by Blackrock iShares and Vanguard's VOO. As always, I recommend downloading the ETF Fact Sheets and summary prospecti for yourself. There you will find the following major differences between SPY and both IVV and VOO:

1. The annualized total returns are lower for SPY by about 12 basis points (0.12%) per year in each time frame. 
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.

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% 16.04% 13.74%
IVV 18.35%  14.14% 15.18% 13.85%
VOO 18.35%  14.14% 15.18% 13.85%

This table of annualized returns for 1- 3- 5- and 10-year periods ending 12/31/2020:

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

The argument for SPY most frequently advanced 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 stealth trades in both IVV and VOO using very large sizes of 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, not SPY. 

If you already own SPY, evaluate your tax situation before selling because capital gains will be realized, and wash sale rules may apply. SPDR created its own alternative to IVV and VOO on January 20, 2021, by changing the benchmark index for SPLG from its own index to the S&P 500; it was the second index change in 8 years for SPLG which was launched in 2013 to track the Dow Jones Total Market Large Cap Index. All three indexes had essentially the same objectives with slightly different methodologies. In theory, SPLG should perform identically with IVV and VOO going forward and the performance on the SPDR website corroborates that expectation while disclosing that the numbers are backfilled. In this manner, SPDR has provided fee-sensitive SPY investors a virtually identical alternative to IVV and VOO which would allow them to keep their assets deployed within the SPDR family. 

The second half of this article deals with Gold Exchange-Traded Products which are essentially depository receipts on gold. There are four major gold ETPs: GLD - SPDR Gold Trusts, IAU - iShares Gold Trust, BAR - Granite Shares Gold Trust, and GLDM - SPDR Mini Gold Trust. All four ETPs use a grantor trust structure which for IRS purposes is classified as pass-through security. In each case, underlying gold bars are held in vaults around the world. 

Here's one important fact taxable investors need to know as a consequence for the classification of pass-through securities The capital gains tax rate may be considerably higher than for normal funds. Gold and hence shares of each of these funds is considered a collectible with a distinct and usually higher tax rate schedule.

Since all four funds are based on the value of the gold they hold, any differences in investor returns is generally a function of the expense ratio as shown in the chart below:

ETF .Expense Ratio  1-Year Ann. Tot. Return

3-Year Ann. Total Return


5-Year Ann. Total Return


10-Year Ann. Total Return.
GLD 0.40% 16.56% 11.45% 8.58% 2.63%
IAU 0.25% 16.90% 11.63% 8.77% 2.71%
BAR 0.17% 16.97% 11..66%
GLDM  0.18% 16.96% N/A N/A N/A

This table of annualized returns for 1- 3- 5- and 10-year periods ending 02/12/2021 based on NAVs according to ETF.com

Even more so than with the S&P-based products, the difference in the gold ETF returns mirrors the differentials in expense ratios. Launched in August 2017 by upstart GraniteShares to compete on the basis of fees, BAR is definitely the disruptor of the group and still the lowest cost provider at 17 basis points. Blackrock lowered its fee to 25 basis points in 2017 in response to the competitive threat. SPDR kept GLD at its fee of 40 basis points while launching a new fund, GLDM with M standing for "Mini shares", at 18 basis points. 

Once again, if you already own GLD and have embedded capital gains, they would be taxed at the generally higher collectible rate so you may choose to hold those shares. Moreover, if you are a short-term trader, especially a long-short high-frequency trade, GLD with more than a billion dollars in average daily trading volume is probably your most comfortable choice.

For any investors buying new shares and intending to hold them more than a few weeks, I recommend buying BAR, the gold ETP I hold in my personal accounts. For those who prefer brand names, especially those wishing to stick with the SPDR family, GLDM is a practically identical alternative with an expense ratio just 1 basis point higher. I find it hard to justify recommending to pay 8 basis points more to buy and hold IAU and impossible to recommend paying 23 basis points more to buy GLD. All four have more than $1 billion AUM and trade at an average spread of one penny according to ETF.com. Therefore, exit liquidity should not be an issue.

I have "buy recommendations" on the 3 S&P 500 ETFs below along with the two lowest-cost Gold Grantor Trust ETPs. From an investment perspective, I actually have neutral positions on both but will buy a proportionate amount of my core US Equity Market exposure ETF and BAR when new cash flows arrive. So when Isay buy below, that assumes dollar-cost averaging. There is certainly little reason, in my opinion, to leave new funds in cash right now. For disclosure, my core US Equity ETF is VTI, also with an expense ratio of 3 basis points, but with a larger slice of the US Stock market which reduces the holdings of VOO from 100% of the portfolio to about 80% with the remaining 20% filled in by midcap and small-cap stocks. The performance differences have been small and the decision of whether to go broader than the S&P 500 with one's core equity holding is a subject I'll leave for a future column.

So, the bottom line is that dynamic markets change realities. The two iconic ETP category identifiers, SPY and GLD, are no longer the best products for most investors. SSgA recognizes that fee-sensitive investors might want lower-cost alternatives which is why they provide SPLG and GLDM in the SPDR family. 

I admit to being a compulsive educator. My advice to use IVV or VOO or SPLG instead of SPY and BAR or GLDM instead of GLD is not based upon opinion, timing or insight - just simple systematic math - it is true always and in every market environment. 

I've been in the industry a long time and have concluded that neither fear nor greed are the basis for things most people do. The main motivator is a legacy bias which can also be thought of as resistance to change, inertia or apathy. Accordingly, many industry participants do not change what they have been doing when new information becomes available. Hence, many investors are still buying SPY and GLD for clients and themselves. I can find no rational reason for this unless exit liquidity of mammoth proportions might be needed suddenly, an extremely rare case. Therefore, please download the fact sheets and/or summary prospectus for yourself. This is always my advice. I am certain you will come to the same conclusions. If so, please feel free to share this article.

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James Sinclair 1 year ago Member's comment

Good advice.

Andrew Armstrong 1 year ago Member's comment

Good read, thanks.

Herbert Blank 1 year ago Author's comment

Thank you very much for your comment @[Andrew Armstrong](user:123431)

Vivian Lewis 1 year ago Contributor's comment

welcome to the blogosphere Herb