Which S&P 500 ETF Is Best For Retirement Investing? October 2024 Edition

Choosing the right investment vehicle for retirement can significantly impact your long-term financial security. Among the myriad options available to investors, S&P 500 exchange-traded funds (ETFs) stand out due to their robust performance and simplicity. Two of the most prominent S&P 500 ETFs, the SPDR S&P 500 ETF Trust (SPY) and the Vanguard S&P 500 ETF (VOO) offer efficient paths to participate in the fortunes of the 500 largest U.S. companies. But which one is the best fit for retirement investing?

Read on for a comparison of both funds, examining cost efficiency, performance history, liquidity, and dividend yield. Whether you’re just starting to plan for retirement or looking to refine your investment strategy, understanding the nuances between SPY and VOO is crucial for building a retirement fund that grows and protects your financial future.

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S&P 500: An Index Weighted Toward Large Companies

The S&P 500 Index, a benchmark of U.S. equities, attributes roughly 33% of its composition to its top 10 holdings, a testament to these large-cap companies’ significant impact on the index. These leading companies, which include tech giants like Microsoft (6.8%), Apple (5.9%) and Nvidia (5.1%), along with others like Amazon (3.8%) and Alphabet (2.3% for GOOGL and 1.9% for GOOG), play pivotal roles in the index’s performance. This concentration highlights the tech-heavy tilt of the index, underscoring the substantial influence of the technology sector on the U.S. market.

The index employs a market capitalization-weighted methodology, meaning companies with higher market caps hold greater weight. This approach favors well-established companies with large market values, leading to significant exposure to a few high performers that can sway the index’s direction. Other major contributors include Meta Platforms (2.2%), Berkshire Hathaway (1.7%), Eli Lilly (1.5%) and Broadcom (1.5%), reflecting a diverse yet concentrated snapshot of American corporate strength across various industries.

Understanding The SPY And VOO ETFs

SPY ETF Overview

The SPDR S&P 500 ETF is a globally well-known and widely-tracked exchange-traded fund. Launched in January 1993 by State Street Global Advisors, SPY was the first ETF listed in the United States and remains one of the largest ($528 billion in total assets) and most heavily traded. Designed to track the S&P 500 Index, SPY exposes investors to 500 of the largest U.S. companies, encompassing diverse industries. This makes SPY a popular choice for investors seeking a straightforward, cost-effective way to gain broad exposure to the U.S. equity market, benefiting active and passive investment strategies.

VOO ETF Overview

The Vanguard S&P 500 ETF is a notable player in exchange-traded funds, offering investors exposure to the 500 largest U.S. companies, mirroring the performance of the S&P 500 Index. Launched by Vanguard in September 2010, VOO is designed for investors seeking a low-cost, diversified and passive investment strategy. It covers multiple sectors, providing balanced exposure across different industries, thus reducing unsystematic risk while maintaining the potential for long-term capital growth. VOO’s broad market representation makes it an excellent foundation for the investment portfolios of both individual and institutional investors aiming for steady market returns.

SPY Vs. VOO ETFs

10-Year CAGR

SPY has been in operation for more than 30 years and has established a robust track record of mirroring the S&P 500’s performance closely. Over the past decade, SPY has posted a compound annual growth rate (CAGR) of 12.8%. Its longer history provides a more extensive data set, which can be advantageous for analyzing performance over different market cycles.

VOO, launched in 2010, has slightly lagged behind SPY in CAGR, with a rate of about 12.4% over the past decade. However, it compensates with lower expense ratios and higher dividend yields, which can be crucial for long-term investment growth, especially in retirement accounts where costs can significantly impact net returns.

Expense Ratios And Fees

Vanguard S&P offers a lower expense ratio (0.035%) than SPY (0.095%), which means lower costs for investors and potentially higher net returns over the long term. VOO might be the more economical choice for cost-conscious investors, especially those investing large sums or planning for long-term goals like retirement.

Dividend Yields

VOO typically provides a higher dividend yield compared to SPY. This aspect is particularly attractive to investors who prioritize income generation from their investments.

Liquidity And Tracking Error

SPY is one of the most liquid ETFs, with high daily trading volumes. This makes it a favorite among active traders who value the ability to enter and exit positions quickly. This high liquidity can be a significant advantage in terms of pricing efficiency and ease of trading.

Both ETFs aim to replicate the performance of the S&P 500 Index closely. However, due to their structural differences and rebalancing strategies, there are slight variations in how closely they track the index, known as tracking error. Historically, both have shown minimal tracking errors.

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Investment Strategy And Goal Horizons

S&P 500 ETFs, such as SPY and VOO, can play a critical role in an investor’s strategy due to their inherent ability to provide broad market exposure, diversification and relatively low cost. These ETFs track the performance of the S&P 500 Index, which includes 500 of the largest companies in the U.S., making them a valuable tool for capturing the overall market trends and growth in the U.S. equity market. For investors with long-term investment horizons, such as those saving for retirement, S&P 500 ETFs are particularly appealing because they offer exposure to a wide swath of the economy, facilitating growth through market cycles with a single investment.

Regarding investment goals, S&P 500 ETFs are versatile enough to serve various objectives, from capital appreciation to portfolio diversification and risk management. They are suitable for passive investors who desire a “set it and forget it” approach and active investors who may use these ETFs as a core holding to build other investment strategies. Moreover, given their liquidity, S&P 500 ETFs allow investors to adjust their positions efficiently as their financial goals or time horizons change whether an investor is looking for a reliable vehicle to accumulate wealth over decades or a lower-risk complement to a more aggressive investment strategy, S&P 500 ETFs can be an integral part of achieving those investment objectives.

Is SPY Or VOO Better for Retirement Investing?

Regarding retirement investing, both SPY and VOO present strong options, each with unique strengths. SPY, the first and one of the most established ETFs in the market, offers unmatched liquidity and is incredibly popular among institutional and retail investors. This high liquidity ensures that investors can execute large trades quickly and at relatively predictable prices, which is particularly valuable in volatile market conditions or when swift portfolio adjustments are necessary. SPY’s long track record provides investors with a wealth of historical data to analyze, offering insights into how it has performed through various economic cycles, which can be invaluable for strategic retirement planning.

On the other hand, VOO boasts lower expense ratios, which can significantly impact net returns over the long investment horizons typical of retirement planning. The lower fees mean that investors keep a higher portion of any returns, compounding positively over time. Additionally, VOO typically offers a slightly higher dividend yield than SPY, which can benefit retirees seeking to generate income from their investments. While SPY may benefit from slightly higher liquidity, VOO’s cost-efficiency makes it an equally compelling option for long-term investors focused on maximizing their retirement savings.

Ultimately, there is no clear advantage to either SPY or VOO over the long run due to market uncertainty and the evolving nature of investment landscapes. Both ETFs provide robust avenues for participating in the growth of the U.S. equity market and can be considered sound choices for retirement portfolios depending on individual investment goals, risk tolerance, and cost sensitivity. However, it’s worth noting that SPY stands out as the most liquid and popular ETF in the world, making it a top contender for those who prioritize flexibility and immediate access to their investments.

Bottom Line

When it comes to retirement investing, both SPY and VOO are formidable choices that offer distinct advantages. With its unrivaled liquidity and widespread popularity, SPY is an excellent option for those who value flexibility and the ability to adjust their investment positions quickly. Its extensive track record provides a reliable dataset for evaluating performance across diverse market conditions, making it especially useful for strategic retirement planning. Conversely, VOO appeals to those prioritizing cost efficiency, with its lower expense ratios potentially offering greater net returns over the long haul. Its slightly higher dividend yield makes it attractive for retirees relying on investment income.

Choosing between SPY and VOO for retirement will largely depend on an investor’s specific needs, including their sensitivity to fees, income requirements and trading preferences. While both ETFs aim to deliver comprehensive exposure to the S&P 500 and have demonstrated robust long-term performance, their choice might hinge on individual investment strategies and goals. Despite the nuances and advantages of each, there is no definitive winner in the long run due to market uncertainties and the inherent unpredictability of investment returns. Nonetheless, SPY does stand out as the most liquid and popular ETF in the world, underscoring its continued appeal to a broad spectrum of investors.

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The brain trust at Forbes has run the numbers, conducted the research, and done the analysis to come up with some of the best places for you to make money in 2024. Download Forbes’ most popular report, 12 Stocks To Buy Now.