SPY's Higher Fees May Cost Investors Thousands Compared to SPYM
Investors in the SPDR S&P 500 ETF (NYSEARCA:SPY) are paying a premium for an index fund that offers the same exposure as its sister fund, the SPDR Portfolio S&P 500 ETF (NYSEARCA:SPYM), but at a significantly higher cost. SPY charges an annual expense ratio of 0.0945%, while SPYM's expense ratio is just 0.02%. This difference translates to approximately $9.45 annually on a $10,000 investment in SPY compared to only $2 for SPYM. Over a long investment horizon, these fees can compound, resulting in thousands of dollars lost to higher costs.
Both SPY and SPYM hold the same 500 stocks in identical weights, making the fee gap particularly striking. SPY's structure as a unit investment trust, established in 1993, prevents it from reinvesting cash dividends and earning income through securities lending, which are advantages that SPYM and other open-end funds like Vanguard's VOO can leverage. For instance, dividends collected by SPY sit in cash until the quarterly distribution, creating a lag that hinders potential compounding. In contrast, SPYM reinvests dividends internally, enhancing its overall returns.
The performance data over the past five years underscores the impact of these fees and structural differences. SPY has returned 73.34% on a price-only basis, while SPYM has achieved an 86.09% return when adjusted for reinvested dividends. Over a decade, SPY's price return is 251.22%, compared to SPYM's impressive 316.09%. Although these figures are not directly comparable due to the differing methodologies, they highlight the long-term cost of SPY's higher fees.
While SPY offers unmatched intraday liquidity and a robust options market, these features primarily benefit active traders. For long-term investors focused on retirement savings, the liquidity premium may not justify the additional costs. Investors should carefully consider their holding period and whether the extra fee for SPY is worth the liquidity benefits they may never utilize. Ultimately, SPYM presents a more cost-effective option for those seeking exposure to the S&P 500 without the burden of higher fees.
