OVL vs. VOO: Old Dog Meets the New Dog

In the world of ETF investing, Vanguard’s S&P 500 ETF (VOO) has long been the “old dog”—a low-cost, passive benchmark for large-cap U.S. equities. But a newer contender, the Overlay Shares Large Cap Equity ETF (OVL), is challenging the status quo with a dynamic options-based strategy. Let’s dissect how these two funds stack up in strategy, performance, risk, and cost.

Investment Strategy: The Core Difference

• VOO: The “old dog” tracks the S&P 500 Index with minimal frills. Its 0.03% expense ratio makes it a gold standard for passive investors seeking broad diversification.
• OVL: The “new dog” aims to outperform the S&P 500 by layering on options strategies. It holds 99.6% of its portfolio in VOO, but supplements this with short-term put options on the S&P 500 (like SPXW futures) to generate income. It also buys puts to hedge downside risks, though these can erode returns if unused.

The strategy hinges on timing: selling puts when markets are stable (to collect premiums) and buying puts as insurance during volatility. However, this introduces complexity and risks tied to derivatives pricing and market direction.

Performance: A Narrow Lead for OVL

Since its 2019 launch, OVL has delivered a 16.28% annualized return versus the S&P 500’s 15.48%—a slim but consistent edge. Year-to-date (YTD) through July 2024, OVL’s NAV rose 19.43% versus the S&P 500’s 16.70%.

However, these gains come with a cost: OVL’s 0.80% expense ratio is over 26 times VOO’s 0.03%. Over time, this fee drag could offset its modest outperformance, especially in flat or declining markets.

Risk Profile: Volatility and Options Exposure

• VOO: As a passive tracker, VOO mirrors the S&P 500’s volatility. Its beta is 1.0, meaning it moves in lockstep with the market.
• OVL: The options overlay adds uncertainty. Selling puts exposes the fund to losses if the S&P 500 drops below the strike price of the sold options. Meanwhile, bought puts may expire worthless, wasting the premium paid.

Historically, OVL’s volatility has tracked closely to the S&P 500, but stress tests reveal risks. For example, during a sharp market decline, sold puts could amplify losses while bought puts might not fully offset them.

Cost Considerations: The Expense Ratio Gap

• VOO’s 0.03% fee is a steal, allowing compounding to work its magic. Over 10 years, a $10,000 investment would lose just $300 to fees.
• OVL’s 0.80% fee, however, costs $800 annually on a $100,000 portfolio. This eats into returns—especially since its outperformance over VOO is marginal.

Conclusion: Choose Your Play

• For VOO: Stick with the passive approach if you prioritize simplicity, minimal fees, and broad market exposure. VOO’s rock-bottom cost and proven track record make it a no-brainer for most investors.
• For OVL: Consider it only if you’re comfortable with active management risks and believe its options strategy can consistently outperform the fee drag. While OVL has shown promise, its success depends on timing the market’s volatility—something even pros struggle with.

The data tells the story: OVL’s 0.8% edge in returns since 2019 is dwarfed by its 0.77% annual fee disadvantage. Unless you’re an aggressive investor willing to tolerate higher volatility for incremental gains, VOO remains the smarter choice.

As the saying goes: “If it ain’t broke, don’t fix it.” For now, the old dog still has the edge.