A major shift is happening in the stock market as investors flee the popular SPDR S&P 500 (SPY) ETF and rotate to its biggest competitors this year. 

SPY, which is the oldest ETF, has been losing assets in the billions, a trend that is accelerating. Data shows that the fund has shed over $20 billion this year, bringing its total assets to $651 billion. It has lost $31 billion since January last year.

On the other hand, the Vanguard S&P 500 ETF (VOO) has become the biggest fund in the world. It has had over $35 billion in inflows this year and a whopping $173 billion since January last year. This surge has brought its assets to over $830 billion.

Why investors are rotating from SPY to VOO and SPYM

The State Street SPDR Portfolio S&P 500 ETF (SPYM) has added $31 billion this year, with its assets soaring to $128 billion. In total, the VOO and SPYM ETF have gained $66 billion in assets this year.

The ongoing performance is primarily because of the fee differential between these funds. While the three of them are highly affordable, the SPY ETF is a more expensive one. It has an expense ratio of 0.09%, meaning that a $100,000 investment will cost just $90 a year. 

On the other hand, Vanguard’s VOO has an expense ratio of 0.03%, while the SPYM costs just 0.02%. A similar investment would cost $30 and $20, respectively. 

The fee differential between VOO and SPYM and SPY is fairly small. As such, investors are rotating from SPY to the two because the fee spread can add up over time. 

Most importantly, these funds track the S&P 500 Index and have similar returns. As such, the view among these investors is that it does not make sense to pay a higher fee just to own SPY. Morningstar said it well when it noted that: 

“When it comes to fees, VOO charges 0.03%, while SPY charges 0.0945%. The difference may be minimal, but there’s no reason to leave cash on the table. With all else equal, the fund with the lower fee is more aligned with investors’ best interests.”

What next for the S&P 500 Index?

The S&P 500 Index ended the week at $6,816, near its highest point since March 10 this year. It has jumped by over 7.3% from its lowest level this year and is a few points below its all-time high.

Looking ahead, the main catalyst for the index will be the outcome of the ongoing talks between the US and Iran in Pakistan. Signs that the two sides are making progress will be highly bullish for the index and its ETFs.

The fund will also react to the upcoming earnings, which will provide more color on their performance. Top companies like JPMorgan, Goldman Sachs, and Citigroup will publish their numbers next week.

Analysts are optimistic that these companies published strong numbers. According to FactSet, the average estimate is that earnings grew by over 13% in the first quarter, the best performance in years.

The most likely scenario is where the S&P 500 Index and the other blue-chip indices, like the Dow Jones and Nasdaq 100 retests their all-time highs. 

This is what has always happened whenever there is a black swan event such as the COVID-19 pandemic and Donald Trump’s tariffs announcement. They all drop in panic and then rebound as investors embrace the new normal.

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