VOO vs. SPY: A Historical Lens on the ETF Fee War

The choice between SPY and VOO is a study in how structural design shapes long-term value. Both track the S&P 500, but their fundamental architectures have led to a decisive market share shift. For the buy-and-hold investor, the math is clear: VOO's structural advantages in cost and tax efficiency have won the battle.

The most direct difference is the fee gap. VOO charges an expense ratio of 0.03%, while SPY's is 0.09%. That 0.06% difference is not a rounding error; it's a persistent drag on returns. For a $1 million portfolio, that's $600 less in annual fees for VOO. Over decades, this compounds into a significant wealth advantage.

This cost gap stems from a deeper structural divide. SPY is a Unit Investment Trust (UIT), a structure that historically has higher administrative costs and less flexibility. VOO, by contrast, is an open-end fund, a model that allows for more efficient operations and, crucially, automatic dividend reinvestment. This distinction creates a tangible "cash drag" for SPY investors. Because of its UIT structure, SPY must distribute dividends as cash, which sits idle before being reinvested. VOO, as an open-end fund, can immediately reinvest dividends back into the portfolio, ensuring every dollar works for the investor from day one.

The historical context underscores this evolution. SPY launched in 1993, pioneering the ETF concept. VOO followed a generation later, in 2010, entering a market where cost and efficiency were becoming paramount. The result is a clear winner-take-most dynamic: VOO's lower cost and superior reinvestment mechanics have driven its assets to $1.5 trillion, dwarfing SPY's $701 billion.

For the long-term investor, the structural choice is a bet on compounding. SPY's liquidity advantage favors active traders, but for those holding for years or decades, the consistent cost savings and seamless reinvestment of VOO create a more favorable setup. The market has spoken, and its preference is for the cheaper, more efficient structure.

The Market's Verdict: From First-Mover to Market Leader

The ETF industry is witnessing a classic market-share war, and the latest round has a clear winner. In early 2024, Vanguard's S&P 500 ETF (VOO) overtook State Street's SPDR S&P 500 ETF (SPY) to become the world's largest fund. This milestone, with VOO holding $632 billion in assets against SPY's $630 billion, was driven by a record $116 billion in net inflows for a single ETF in 2024. The shift is a powerful reminder that even a three-decade first-mover advantage can be eroded by relentless cost competition.

The playbook is straightforward. VOO's net expense ratio of 0.03% is less than a third of SPY's 0.0945% fee. This gap, while seemingly small on a per-investment basis, compounds over time and has become the decisive factor for a new breed of investor. The market is now dominated by retail investors, who account for three-quarters of US ETF assets. These cost-conscious, buy-and-hold investors are voting with their dollars, favoring the lowest-cost option for the same underlying index.

The result is a widening exodus from the former leader. SPY is now experiencing its largest annual outflows ever, with $32.7 billion pulled so far this year. This capital flight, even as the S&P 500 index itself climbs, underscores the power of fee sensitivity. The historical pattern is clear: new entrants leverage lower costs to capture market share, a dynamic Vanguard itself triggered in 2019 when it cut VOO's fee to 0.03%. Now, the incumbent is fighting back, with State Street recently cutting fees on 10 of its SPDR funds, but the momentum has clearly shifted.

The bottom line is that the ETF market is maturing into a low-cost, high-volume commodity. SPY's reign as the industry's flagship is over, replaced by a fund that simply costs less to own. For investors, the verdict is a simple arithmetic: in a market where assets are fungible, the lowest fee wins.

Performance and Risk: The Narrowing of the Gap

For the typical long-term investor, the choice between VOO and SPY has become a study in the power of compounding small advantages. Over the past decade, the funds have delivered nearly identical returns, with VOO's annualized average of 14.68% slightly outpacing SPY's 14.60%. This minute difference is not a result of superior stock picking or market timing. It is the direct outcome of structural efficiencies: VOO's lower expense ratio and its marginally higher dividend yield. When returns are adjusted for stock splits and include dividends, the math is clear. Over a 10-year horizon, that tiny edge compounds into a meaningful performance divergence.

The risk profiles of the two funds are indistinguishable. Both have a beta of 1.00, meaning they move in lockstep with the broader market. Their worst-case losses have been identical, with maximum drawdowns of -24.5% over the past five years. This convergence in volatility and downside risk underscores that the funds are true peers in terms of exposure. The slight edge in dividend yield-1.12% for VOO versus 1.06% for SPY-further compounds the long-term advantage by boosting total return through more frequent and slightly larger reinvested payments.

The bottom line is that the gap is narrowing, and for good reason. VOO's lower cost and higher yield provide a persistent, structural advantage that benefits every investor, regardless of portfolio size. While SPY's higher assets under management offer a liquidity premium, VOO's superior cost structure and yield make it the more efficient vehicle for building wealth over time. For a long-term investor, the choice is no longer about performance or risk, but about which fund best captures the market's return with the fewest fees and the most reinvested income.

Catalysts and Risks: The Future of the Fee War

The primary catalyst for the ongoing battle between Vanguard's VOO and State Street's SPY is the relentless ETF fee war. This dynamic was reignited last month when State Street Global Advisors, the world's third-largest ETF manager, slashed fees on 10 of its SPDR series ETFs, including its S&P 500 fund, SPLG. The move brought the average expense ratio for those funds down to 0.039%, a 40% cut that makes SPLG the cheapest S&P 500 ETF. This aggressive pricing is a direct response to the market dominance of Vanguard's VOO, which has held a 0.03% expense ratio since 2019. The fee war is a zero-sum game for fungible products; as State Street cuts, competitors like Vanguard face pressure to defend their cost leadership, which is the core of VOO's appeal.

For VOO, the key risk is a distant but structural one: its sheer size. With $1.5 trillion in assets under management, the fund's liquidity and tracking precision are currently strengths. However, as the fund continues to grow, the practical mechanics of buying and selling such massive blocks could eventually impact its ability to perfectly mirror the index, especially during periods of high volatility. This is a concern that only materializes at extreme scale, but it represents a potential vulnerability for the world's largest ETF.

For investors, the critical watchpoint is whether the fee advantage remains the dominant factor as the ETF landscape diversifies. The broader market is becoming increasingly noisy, with more ETFs than listed public companies and a surge in niche and active products. Record flows in 2025, with U.S.-listed ETFs adding over $1.3 trillion, show the market's appetite for choice. Yet the rise of retail investors-now accounting for three-quarters of U.S. ETF assets-reinforces the power of cost. These investors, who are often buy-and-hold and focused on compounding, are the ones who will continue to drive assets toward the lowest-cost index solutions like VOO. The fee war, therefore, is not just a pricing tactic; it is a battle for the future of passive investing, where the winner will be the fund that best captures the capital of the cost-conscious retail investor.