What is the best way to invest in the S&P 500 of the USA?

The Standard & Poor's 500 is the most representative index of the stock market in the U.S. Along with the popular Dow Jones, the technology index Nasdaq 100, and the Russell 2000, it comprises the four most important indices of the North American equity market.

The SP500 is just an index (a list of 500 weighted market capitalization companies selected by the SP Ratings committee), and it cannot be invested in directly; thus, it must be done through an ETF that replicates the performance and behavior of this indicator.

The two largest and most important ETFs that try to replicate the behavior of the SP500 are the SPY (State Street Global Advisors) and the VOO (Vanguard). The SPY, with 503 stocks, is the oldest, founded in 1993, while the VOO, with 504 stocks, was created in 2010; both replicate the same index, but there are differences that investors must understand before choosing an index fund for the S&P 500:

1.      Expenses:

SPY has an expense ratio of 0.0945%, while VOO has 0.030%, one of the lowest expense ratios for S&P 500 ETFs. This makes VOO more profitable for long-term investors, as small differences in expenses for medium and long-term investments impact final returns over time.

2.      Liquidity and Spread:

SPY is one of the most traded ETFs with extremely high volumes. This liquidity benefits short-term traders and investors with frequent or “intraday” transactions, as it minimizes the spreads between supply and demand and allows for “more efficient trades.”

VOO is slightly less liquid than SPY, with substantial trading volume and liquidity that meets the needs of most individual medium and long-term investors. However, it is not optimal for high-frequency trading strategies.

3.      Legal Structure and Taxation:

SPY is structured as a Unit Trust, which restricts its ability to reinvest dividends directly into the fund. Instead, cash dividends are distributed to investors, who must pay the respective taxes according to their tax condition.

VOO, structured as an open-end fund, has the flexibility to reinvest dividends. This potentially adds tax efficiency and makes it more attractive to long-term investors who prioritize compound growth.

Which one do you choose according to your profile and goals as an investor?

Roman Gutierrez

Portfolio Manager and Director Baltic For Pros

CEO Intelligent Money Wealth Management

https://investor.vanguard.com/investment-products/etfs/profile/voo

https://www.ssga.com/us/en/intermediary/etfs/spdr-sp-500-etf-trust-spy