VOO Just Hit $1 Trillion. The Story About SPY Being a Rip-Off Is Wrong For The Wrong Reason.

I always keep an eye out for false narratives that take the ETF space by storm. The latest one has a headline-friendly arithmetic trick: Vanguard's S&P 500 ETF (VOO) just became the first exchange-traded fund in history to surpass $1 trillion in assets — a milestone confirmed by Vanguard on June 2, 2026 — and SPY holders are "paying 3x more for the same index." The math behind the headline is real. VOO charges 0.03% annually, and SPY charges 0.0945%. But the conclusion that SPY is a rip-off is a category error dressed up as consumer advocacy.

The three funds track the same 500 companies with the same market-cap weights. On paper, they're identical. That's the narrative everyone accepts because it's easy. But they are not the same product, they serve fundamentally different investors, and comparing them on expense ratio alone is like judging a cargo ship by how fast it goes around the harbor.

VOO and its BlackRock rival IVV (also at 0.03%) are built as open-end funds. That structure allows in-kind creation and redemption, which means authorized participants can swap baskets of shares for ETF units without triggering taxable sales inside the fund. VOO gets an extra layer of tax efficiency from its unique arrangement as an ETF share class of the massive Vanguard 500 Index mutual fund, which lets Vanguard purge low-cost-basis shares through mutual fund redemptions. The result is tighter tracking — VOO trails the S&P 500 by roughly 0.02% to 0.04% — and near-zero capital gains distributions to shareholders.

SPY, by contrast, was launched in January 1993 as a Unit Investment Trust (UIT) — the oldest ETF structure in the business. A UIT is a fixed basket. It cannot do in-kind creations or redemptions. It cannot reinvest dividends from its holdings between quarterly distribution dates, leaving cash sitting idle. It cannot lend securities to short sellers, cutting off a revenue stream that VOO and IVV use to offset their already-thin costs.

So what does SPY's 0.0945% fee actually buy? Liquidity that VOO and IVV don't come close to matching. Today, SPY's daily turnover is roughly 4.2% of its outstanding shares, versus 0.3% for VOO. In raw terms, SPY trades about 44 million shares today versus VOO's 4.7 million — nearly ten times the volume. That depth matters for institutions executing multi-billion-dollar risk trades, for options traders who rely on the world's most liquid options market, and for anyone who needs to move size without moving the price. SPY's bid-ask spread is measured in fractions of a cent. For active traders, that liquidity premium more than offsets the extra 61 basis points in fees.

For a buy-and-hold investor, that liquidity premium is dead weight. If you're setting aside money every month for retirement and not touching it, paying 0.0945% instead of 0.03% costs you roughly $350 extra per $100,000 invested over ten years — money that stays in your account with VOO or IVV and compounds. On VOO's current $995 billion AUM, that fee differential would generate roughly $358 million per year in additional revenue for Vanguard versus SPY's fee structure. That's why VOO reached $1 trillion first and why it overtook SPY as the world's largest ETF about 18 months ago.

The dividend data tells the same story. VOO currently yields 1.03% on a trailing-twelve-month basis, versus SPY's 0.97%. The gap is small in any single quarter, but over decades, SPY's cash drag — those idle dividend dollars waiting for the next quarterly distribution — compounds into a measurable underperformance. Independent analysis of the three funds puts SPY's cumulative trailing gap relative to VOO and IVV at roughly 0.5% to 0.7% over a decade, with the UIT structure's dividend drag being the primary driver.

That being the case, I believe the headline is right about the cost but wrong about the problem. SPY isn't overpriced for what it does. It's simply not designed for what most retail investors need. The false narrative isn't that SPY is expensive — it's that expense ratio is the only metric that matters when choosing between these funds. For a long-term holder, the structural advantages of VOO's open-end format — tax efficiency, immediate dividend reinvestment, tighter tracking, and a fee that's one-third of SPY's — make it the clear choice. For an active trader, SPY's liquidity and options market depth are worth every basis point.

There's also the question of IVV, which shares VOO's 0.03% fee and open-end structure. IVV is a perfectly competent holding and sits at roughly $860 billion in AUM, well behind VOO but ahead of SPY at $810 billion. In my opinion, VOO's mutual fund linkage gives it a marginal edge on tax efficiency, but the practical difference for most investors is negligible. Either Vanguard or BlackRock's wrapper works for a buy-and-hold strategy.

The bigger picture is what VOO's trillion-dollar crossing tells us about the industry. Passive indexing has won. The S&P 500 is up roughly 13.3% year-to-date, rolling annual returns sit above 21%, and Goldman Sachs recently raised its year-end S&P 500 forecast to 8,000, citing AI-infrastructure beneficiaries as roughly half of expected 2026 earnings growth. That macro tailwind is fueling all three funds. But the winner — the one capturing the flow — is the fund whose structure best matches how ordinary people invest: buy, hold, don't think about it, and let the compounding work.

For investors who want a core S&P 500 holding and plan to hold it for years, VOO is the superior choice. The 0.03% fee, open-end structure, and tax efficiency make it the default wrapper for buy-and-hold portfolios. SPY, for all its history and market dominance, is the infrastructure layer — the plumbing Wall Street trades through — not the vehicle retail investors should store their savings in.