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SPY Outshines VOO and IVV in Liquidity, but Pays Higher Fees

  //stocks-investing.news-articles.net/content/202 .. o-and-ivv-in-liquidity-but-pays-higher-fees.html
  Published in Stocks and Investing on Tuesday, December 16th 2025 at 10:22 GMT by The Motley Fool
      Locale: Massachusetts, UNITED STATES

Choosing the Right S&P 500 ETF: A 2025 Review

In December 2025, The Motley Fool published a detailed examination of the most popular exchange‑traded funds that track the S&P 500. The piece—titled “Is This ETF the Best Way to Invest in the S&P 500?”—offers readers a side‑by‑side look at the three leading options—SPDR S&P 500 ETF Trust (SPY), Vanguard S&P 500 ETF (VOO), and iShares Core S&P 500 ETF (IVV)—and explains why none of them is a one‑size‑fits‑all solution. Below is a concise summary of the article’s key take‑aways, organized by the criteria investors care most about: cost, liquidity, tax efficiency, and overall suitability for different investing styles.

1. The Basics of the Three ETFs

SPY has been the market’s most liquid S&P 500 ETF for decades, boasting the highest trading volume and the tightest bid‑ask spreads. VOO and IVV, both launched in 2010, have lower expense ratios—three‑quarters of SPY’s—and are highly regarded for their tax efficiency. The article points out that the differences in dividend yield are negligible, with all three funds mirroring the index’s distribution very closely.

2. Tracking the Index

The core question for any passive investor is how well the ETF follows its benchmark. The Fool article highlights that SPY’s tracking error is only 0.01 % against the S&P 500 over the past five years—a level virtually indistinguishable from the other two. VOO and IVV have comparable performance; their tracking error is similarly tiny, often less than 0.005 %. The takeaway is that all three funds deliver near‑perfect replication, and the choice usually hinges on the factors that follow.

3. Expense Ratios: Small Differences, Big Impact

Although 0.06 % might sound trivial, the article emphasizes how compounding works over a long investment horizon. Using a $10 000 initial investment, the paper illustrates that SPY would cost roughly $300 in fees over 30 years, while VOO or IVV would leave an extra $200 to invest—an incremental 6‑8 % advantage depending on the exact market performance. For the “cost‑conscious” investor, VOO or IVV clearly wins.

4. Liquidity and Trading Costs

Liquidity is a major strength of SPY. The fund’s average daily volume exceeds 50 million shares, and its average bid‑ask spread is just $0.03 per share—often less than a 0.1 % trade cost. The article shows that this advantage translates to a lower “transaction cost” for high‑frequency traders or those who rebalance their portfolios frequently. In contrast, VOO and IVV, while still highly liquid (around 5 million shares daily), have slightly wider spreads. The piece suggests that for long‑term “buy‑and‑hold” investors, the difference is negligible, but active traders might prefer SPY.

5. Tax Efficiency

Both VOO and IVV use the “in‑kind” creation and redemption process to keep capital gains low. SPY, however, must settle in cash for large block trades, which can sometimes trigger taxable events for the fund’s shareholders. The article cites a 2025 tax‑loss‑harvesting example: a 10 % portfolio gain in SPY would result in $1 000 of realized gains, whereas IVV would generate only $700. For investors in higher tax brackets, this matters significantly.

6. Dividend Reinvestment

The Motley Fool article touches on how each ETF handles dividends. SPY pays dividends monthly, whereas VOO and IVV do so quarterly. While the difference in timing is minor, the article notes that monthly distributions can be useful for investors who want more regular income streams. It also discusses the dividend reinvestment plan (DRIP) options offered by each provider—SPY’s broker‑free DRIP is convenient, but both VOO and IVV offer automatic reinvestment with a small fee.

7. Who Should Pick Which ETF?

Long‑Term, Cost‑Focused Investors:
The article recommends VOO or IVV for those who want the lowest possible expenses and don’t need the extra liquidity of SPY. Its expense ratio advantage can translate to noticeable gains over decades.

Active Traders or Institutional Clients:
SPY’s superior liquidity and tighter bid‑ask spreads make it the best choice for frequent traders or those who manage large positions.

Tax‑Sensitive Investors:
IVV’s slight edge in tax efficiency, combined with its robust liquidity, makes it an attractive middle ground.

Income‑Seeking Investors:
If monthly income is a priority, SPY’s monthly dividends might be preferable, though the yield differences are minimal.

8. Practical Steps to Invest

The article concludes with a short “how‑to” guide for buying an S&P 500 ETF. It recommends:

1. Open a brokerage account that offers commission‑free trades on the desired ETF.
2. Place a limit order to avoid slippage, especially when buying SPY.
3. Enroll in a DRIP to automatically reinvest dividends unless you prefer to withdraw them.
4. Set up a systematic investment plan (SIP) to dollar‑cost‑average into the chosen ETF over time.

9. Final Verdict

While all three ETFs deliver near‑identical returns over the long term, the Fool article points out that “the best way” to invest in the S&P 500 depends on individual preferences and investment style. For the average investor focused on minimizing costs, VOO or IVV is usually the top pick. For those who prioritize liquidity or need monthly income, SPY remains a solid choice.

In a nutshell, the article is not about a single “best” ETF but rather about matching the right tool to the investor’s goals. By examining expense ratios, liquidity, tax considerations, and dividend timing, readers can make an informed decision that aligns with their personal investing strategy.