The battle of S&P 500 funds is over — and the cheaper one won

For decades, one exchange-traded fund (ETF) ruled the S&P 500 landscape. The SPDR S&P 500 ETF Trust, better known by its ticker symbol SPY, held the crown as the world’s largest exchange-traded fund since its launch in 1993. Wall Street traders and Main Street investors alike poured money into this giant, making it the go-to choice for anyone who wants to invest in the 500 largest U.S. companies.

But not anymore. The Vanguard S&P 500 ETF (VOO) overtook SPY in 2025 to become the largest ETF by assets under management. VOO now holds roughly $772 billion in assets, compared with $677 billion for SPY. The gap keeps widening, with VOO gaining $124.4 billion this year, while SPY shed more than $46 billion.

So what happened? How did an ETF that launched 17 years after SPY manage to dethrone the longtime champion?

The fee difference adds up fast

The answer may come down to one simple factor: cost.

VOO charges an expense ratio of just 0.03%, while SPY costs 0.0945%. These expense ratios are the annual fee you pay to own shares of the fund, taken as a small percentage of your investment.

Here’s what those percentages mean in real dollars:

That difference might not seem like much year to year. However, those extra fees come straight out of your returns, and over time, they accumulate.

Let’s say you invest $100,000 and leave it alone for 30 years. Assuming an 8% average annual return, here’s what you’d end up with:

This means you’d end up paying about $18,000 more for highly similar assets. Both funds own the same 500 companies in the same proportions. Both go up and down together. The main difference is how much of your money disappears into fees.

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SPY’s 1990s design holds it back

There’s another reason SPY struggles to keep pace with VOO, and it comes down to the way the fund was built back in 1993.

SPY launched as a unit investment trust (UIT). UITs were a common structure back then, but they come with limitations that seem outdated today. One key limitation is that SPY can’t automatically reinvest your dividends.

Here’s how dividends work in SPY

The 500 companies in the S&P 500 may pay dividends throughout the year. When SPY receives those dividend payments, the fund is legally required to pass them directly to you as cash. It can’t keep that money and use it to buy more stocks on your behalf.

Instead, SPY collects all the dividends it receives and distributes them to shareholders once per quarter. During that waiting period, the cash just sits there doing nothing. It’s not earning returns. It’s not compounding. It’s just waiting.

If you want those dividends reinvested, you have to set up a dividend reinvestment plan (DRIP) through your brokerage. Most brokers offer this feature, but the reinvestment happens at the brokerage level outside the fund.

How VOO handles dividends

VOO operates as an open-ended fund, which gives it more flexibility. When cash dividend payments come in from the S&P 500 companies, VOO can reinvest that money back into those companies until the quarterly payout. From there, you’ll still need a DRIP to reinvest the payouts you receive.

This structure also helps VOO handle taxes more efficiently. When large institutional investors cash out, VOO can choose which specific stocks to hand over. By giving them the stocks with the biggest gains, VOO removes those potential tax bills from the fund. This helps reduce future taxes for everyone who stays invested.

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Which fund should you choose?

SPY dominates among active traders thanks to its unmatched trading volume, with more than 73 million shares changing hands on a typical trading day. Day traders and institutional investors value this liquidity, which enables them to execute large trades more easily and quickly without affecting the price.

SPY also has an extensive options trading market, where investors can buy and sell contracts based on the fund’s future price movements. These contracts let traders protect existing positions or speculate on price swings.

VOO, on the other hand, has a smaller daily trading volume of about 7 million shares. Yet, it has clearly become the preferred choice for retail investors focused on long-term wealth building. People saving for retirement over decades tend to prioritize low fees over high liquidity or complicated financial tools like options contracts.

Since VOO, SPY and other S&P 500 ETFs hold the same 500 companies, their performance is virtually identical before fees. Owning both doesn’t add any diversification, as you’re simply duplicating the same investment. The main difference comes down to costs and how you plan to use the fund.

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5 investing basics that work with any S&P 500 fund

Whether you choose VOO, SPY or other S&P 500 ETFs, these core principles apply to building wealth through index funds:

• Dollar-cost averaging smooths out the ride. This simple strategy involves investing a fixed amount at regular intervals regardless of market conditions. When prices drop, the same dollar amount buys more shares. When prices rise, it buys fewer. This approach helps reduce the pressure of trying to time the market.

• Time in the market beats timing the market. A hypothetical investor who missed just the best 5 days in the market since 1980 would have reduced their gains by 37%. The problem is nobody knows which days will be the best days until after they happen.

• Automatic dividend reinvestment. Most brokerages offer automatic reinvestment, which uses the dividends you receive to buy more shares. The op. Those additional shares generate their own dividends, which buy even more shares. Over time, this compounding effect can significantly boost total returns.

• Market downturns happen regularly. The S&P 500 has dropped 20% or more roughly once every six years on average. These bear markets feel unsettling in the moment, but historically, the market has always eventually recovered and gone on to new highs. Selling during a downturn locks in losses, while staying invested can help you join the recovery.

• Low costs keep more money in your pocket. Funds with higher fees often promise sophisticated strategies or active management, but those features don’t guarantee better returns. A fund charging 0.50% needs to outperform a 0.03% fund by nearly half a percentage point just to deliver the same returns after fees. That’s a significant hurdle, especially compounded over decades.

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