In a telling reversal in the universe of passive investing, frugal investors are seemingly voting with their feet, away from traditional heavyweight SPDR S&P 500 ETF Trust SPY and toward its cheaper counterpart, the Vanguard S&P 500 ETF VOO. FactSet data, cited by etf.com, shows that VOO saw $14.9 billion in net inflows during the 30 days ended May 22, while SPY saw the biggest outflows of any exchange-traded fund, $17.3 billion.

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This sharp divergence of fund flows between two virtually identical S&P 500-index ETFs reflects a deeper trend of passive asset consolidation where expense ratios are becoming ever more influential in driving investor behavior. While SPY and VOO posted exactly the same 7.1% returns over the past month, the latter’s lower expense ratio of 0.03% versus SPY’s 0.09% has appealed to investors operating in an environment of increasing market volatility and macro uncertainty.

As of May 23, VOO had $659.2 billion in assets under management, outpacing SPY’s $607.9 billion and solidifying its position as the world’s largest asset under management ETF.

Legacy Fund Meets Cost-Effective Upstart

While SPY boasts the title of being the original U.S.-listed ETF and long the market leader, its expense structure is rapidly becoming a handicap in the presence of lower-cost alternatives.

SPY exists as a Unit Investment Trust (UIT), which ties its hands when it comes to reinvesting dividends and from exercising flexibility in portfolio management. On the other hand, VOO, an open-end fund structure, permits reinvesting and generally has more optimal tax management.

Liquidity continues to be a differentiator for SPY, particularly among institutional investors who appreciate its narrower bid-ask spreads and rich trading volume. Yet for long-term owners, both retail and institutional, the cost difference seems to be prevailing. The steady drain of assets out of SPY indicates a heightened preference for long-term cost-effectiveness over short-term trading convenience.

IVV Vs VOO: Two Low-Cost Colossi, One Champion

BlackRock’s iShares Core S&P 500 ETF IVV has also registered huge outflows, with $10.2 billion out over the same timeframe as SPY and VOO, even as it provides an expense ratio of 0.03%, equal to VOO’s. IVV has $586.6 billion in assets and is also an open-end fund structure, theoretically providing the same cost benefit as VOO. Investor bias appears to have fallen overwhelmingly towards Vanguard.

The difference could be in long-term investor sentiment and brand trust. Vanguard’s brand of client ownership and dominance among long-term passive investors could be tipping the balance. Additionally, VOO recently reached AUM high could be further fueling the “herding” tendency commonly experienced in asset flows, as size tends to attract more flows, solidifying its dominance.

BlackRock’s core equity exposure product lineup, while industry-leading in other areas such as fixed income and thematic strategies, might be losing ground as investors are moving to concentrate positions in one low-cost provider.

VOO Becomes The Passive Benchmark

While VOO keeps setting the pace in inflows and redefining the pecking order in S&P 500 ETFs, investors’ message is unequivocal: in passive investing, basis points matter. Amidst a world where low-fee, high-efficiency investing reigns supreme, Vanguard’s leader equity ETF is not merely tracking the market, it’s leading it.

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