Home Trading ETFs VTI Vs. SPY: What’s Different And Why We Care (NYSEARCA:SPY)

VTI Vs. SPY: What’s Different And Why We Care (NYSEARCA:SPY)

by Vidya
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Alexey_Arz/iStock via Getty Images

Thesis

The Vanguard Total Stock Market ETF (NYSEARCA:VTI) and SPDR S&P 500 Trust ETF (NYSEARCA:SPY) are among the most popular funds for investors to gain market-wide exposure. And they both do an excellent tracking their target indices. As you can see from the following chart, VTI suffered a 13.44% price correction in the past year, essentially identical to the 13.39% correction from the CRSP US Total Market Index. The small difference is mostly due to the sampling used in VTI. And SPY suffered a 10.72% price correction in the past year, again essentially identical to the 10.71% correction from the S&P 500 index.

And they also share many similarities between the two of them. For example, VTI not only contains all the 500 large-cap stocks that SPY holds, but it also is dominated by those 500 holdings (which represent more than 80% of its total asset as to be detailed later).

However, upon a closer look, there are a few differences too. And I will explain why they made me choose VTI over SPY as a core holding in our accounts. These considerations include:

  • VTI’s lower fee of 0.03% compared to SPY’s 0.09% fee
  • VTI’s broader market exposure. As aforementioned, more than 80% of its holdings overlap with SPY in the large-cap space, but the rest 20% are different and provide exposure to other market sectors (primarily mid-caps and small-caps)
  • And currently, the mid-cap and small-cap holdings are at a very attractive valuation in a decade.
VTI vs SPY

Seeking Alpha

Difference 1: fee

If you are buy-and-hold investors, the largest deciding factor for the long-term performance of passively index funds is the fee. Period. And VTI’s fee (0.03%) is lower than SPY’s (0.09%) by 0.06%. It is really a small difference. But it’s a little bit more than what’s on the surface once you put it under perspective. In the long-term, the market on average delivers about a 6% to 7% of annual total return. As a result, a 6 basis point difference is about 1% of your total return annual return. Still not that big of a deal, but not as negligible as on the surface.

And if you hold them over a long period of time, such a small difference can cumulate and becomes noticeable as you can see from the following chart. Over the past decade or so since 2011, SPY has delivered an annual return of 12.15%. Now compare that to VOO, a fund that follows an identical indexing strategy but has a lower fee of 0.03% just like VTI, you can see their difference in the annual return is exactly 0.06% (12.21% vs 12.15%) – exactly the difference in their fees. If you have other considerations (active trading, tax hurdle if you switch out of SPY, et al), the extra 0.06% may be justifiable. But otherwise, if the fee benefit comes at no extra cost or effort (like in our case), it only makes sense to just grab it.

Now let’s get back to the comparison of VTI and SPY. Firstly, you can see that VTI’s performance closely tracked the performance of SPY. And this should come as no surprise because after all, ~80% of their holdings are identical as aforementioned. Looking closer, you can see VTI has delivered an annual return of 11.76%, 39 basis points below SPY. And the difference here is mostly due to the recent large correction in the mid-cap and small-cap sectors (larger than the large-cap sector). Such correction has brought their valuation to the most attractive level in a decade, as to be detailed next.

VTY Vs SPY portfolio returns

Source: Portfolio Visualizer

Difference 2: exposure

The next more important consideration for us is the difference in their exposure. The next chart compares their market cap and style exposure. The SPY, of course, is all in large-cap. More specifically, it is currently split almost half-half between large-cap growth and value, with a little more allocation on growth (53.25% vs 46.25%). In contrast, VTI is “only” about 81% in large-cap, and again with a little bit more allocation on growth style than value (47.15% vs 34.52%). This is the more than 80% overlap we mentioned before.

Now, the key difference is in the rest of the 19% in VTI. As you can see, they are invested in mid-cap and small-cap. As seen, VTI holds about 10% of mid-cap stocks (9.5% to be more precise). The split in the mid-cap space is heavily skewed toward growth with 2.09% mid-cap value and 7.48% mid-cap growth. the remainder 9% is vested in small caps primarily (about 7.8%) and other categories (such as emerging markets and Global ex-US Developed Markets). The split in the small-cap space is heavily skewed toward value (4.85%) and growth is only at 2.96%.

Then next we will see why the 19% difference matters.

VTI vs SPY style category

Source: Portfolio Visualizer

Difference 3: valuation

As aforementioned, both the large-cap (represented by SPY) and the total market (represented by VTI) suffered sizable corrections recently. However, the corrections impacted different market segments differently as you can see from the following three charts. The large-cap suffered the least amount of correction, the mid-cap suffered more, and the small-caps suffered the most.

More specifically, the FW P/E of the 500 large-caps in the S&P 500 is currently 16.1x as you can see from the first chart below. Its current valuation is about 24% above its bottom valuation around 13x amid the COVID crash.

As you look at the second chart, you will see that mid-cap is currently valued at 11.6x FW P/E. It is a whopping 28% discount compared to the large caps. Furthermore, it is only 10% above its bottom valuation around 10.5x amid the COVID crash. Now moving on to the third chart for small-caps. Small-caps are currently valued at 11.4x FW P/E. It is almost at a 30% discount compared to the large caps. And it is essentially at its bottom valuation during the COVID crash!

And finally, the 2nd and 3rd chart show that both mid-cap and small-cap are currently trading at FW P/E levels that are not far away from the 2008 great recession.

S&P 500 Large cap daily chart

Source: www.yardeni.com/

S&P 400 Midcap chart

Source: www.yardeni.com/

S&P 600 SmallCap chart

Source: www.yardeni.com/

Final thoughts and risks

For these above considerations, we hold VTI as a core holding in our accounts. We always hold two separate accounts in a barbell model, one for short-term survival and the other for long-term aggressive growth. The links here are for our free blog articles where we update our detailed holdings and performance tracking periodically. Take the survival portfolio as an example, the following chart shows our holdings for the incoming month. As you can see, we maintain a relatively simple portfolio with a few core ETFs (and VTI is our core holding for U.S. exposure) and a few tactical holdings.

Survival portfolio - VTI vs SPY

Author

Now, there may be some considerations against VTI also depending on your style and risk tolerance. VTI is more volatile than SPY due to the mid-and small-cap holdings, especially during market turmoil. If you look closely at the 3 Yardeni charts above, you can see the shaded red areas are the S&P 500 bear market declines of 20% or more. And the blue shaded areas are correction declines of 10% to less than 20%. Mid-caps and small-caps typically suffered more severe corrections during those periods than large caps. SPY also provides better liquidity and trading volume. According to Seeking Alpha data, the average daily dollar volume for VTI is less than $1B (about $945M to be more precise), but a whopping $38B for SPY even though their AUM is on the same order of magnitude ($238B for VTI and $348 for SPY).

Finally, there is also a risk of a recession that could impact both SPY and VTI. As communicated in our marketplace service over the weekend, in my mind, the most important chart for this month is the following one – showing the inversion of the yield curve (again). The last time we saw the inversion was in April. As I am typing these lines, the 10-year treasury rate (2.98%) is both blow 1-year treasury rates (3.11%), 2-year rates (3.17%), and 5-year rates (3.09%). For us, we are still only making gradual adjustments based on our “business-as-usual model”. We are not activating our “bottom-fishing allocation model” yet. In a nutshell, we monitor other indicators besides the yield curve inversion, and we do not see equity cheap enough for bottom-fishing yet from these other indicators.

10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity

FRED



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