Tracking the S&P 500 With Mutual Funds and ETFs

There are more than 40 mutual funds and exchange-traded funds (ETFs) widely available to investors that explicitly list the S&P 500 in their name, as of December 2016.

These funds track the large-cap index or follow a strategy based on a variant weighting or a subset the index.

A challenge for investors seeking passive exposure to the large-cap index is choosing which fund to invest in. The decision depends on both the characteristics being sought and the willingness to look closely at the strategy a fund is designed to follow. In this article, I discuss some of the basic differences between the various S&P 500 funds.

Getting the S&P 500’s Return

If the goal is to match the return and the volatility of the S&P 500, the traditional, market-cap-weighted S&P 500 funds are what should be looked at. These funds, included in Table 1, attempt to replicate the returns and the volatility of the large-cap index. The largest of them is the Vanguard 500 Index fund (VFINX) with $282.5 billion in assets. On the ETF side, the SPDR S&P 500 ETF (SPY) has the most assets at $224.8 billion. Both were the first in their respective categories to track the large-cap index. (All of the data used in this article is as of December 31, 2016, unless specifically stated otherwise.)

There are competitors. On the mutual fund side, there is Deutsche Equity 500 Index (BTIEX), Deutsche S&P 500 Index (SCPIX), Dreyfus S&P 500 Index (PEOPX), Fidelity 500 Index Investor (FUSEX), Schwab S&P 500 Index (SWPPX), Shelton S&P 500 Index Direct (SPFIX), SSgA S&P 500 Index (SVSPX), T. Rowe Price Equity Index 500 (PREIX) and USAA S&P 500 Index Member (USSPX). On the exchange-traded fund side, there are the iShares Core S&P 500 (IVV) and the Vanguard 500 ETF (VOO).

Though all of these funds are similar, they are not exactly the same. Vanguard 500 ETF and Vanguard 500 Index Admiral (VFIAX) have the highest five-year returns at 14.6%, while Dreyfus S&P 500 Index fund has the lowest return at 14.1%. A key reason may be the expense ratio. Vanguard charges 0.05% for its ETF and Admiral mutual fund shares; iShares charges 0.04% for its ETF. In comparison, Dreyfus S&P 500 is the costliest of the group, with an expense ratio of 0.50%. (The returns in Table 1 are truncated to match the formatting used in our mutual fund and ETF guides. If the data were rounded instead, the iShares fund would have a five-year return of 14.6%. The differences between the two Vanguard S&P 500 mutual fund share classes are the expense ratio, which is higher for the Investor class, and the Admiral class’ higher minimum initial investment of $10,000.)

Comparing on Fees

At this point, it’s worth considering what a difference in expenses means in terms of absolute dollars. A one basis point fee (0.01%) charged on a $10,000 investment is $1. An investor opting for Dreyfus S&P 500 over iShares Core S&P 500 would lose $46 per year in expenses for every $10,000 invested. As the amount of dollars invested into a fund increases, the impact that expenses will have on absolute basis gets larger. The effect has a compounded drag on returns since a higher expense ratio results in a larger dollar amount of fees paid and less money available to take advantage of future growth.

Table 1. S&P 500 Mutual Funds and ETFs Sorted By Type

	Total Return (%)		Averge Annual Return (%)			Total Assets ($ Mil)	Expense Ratio (%)
Fund Name (Ticker)	2016	2015	Last 3 Yrs	Last 5 Yrs	Last 10 Yrs
Market-Cap Weighted
Deutsche Eq 500 Idx S (BTIEX)	11.5	1.1	8.5	14.2	6.6	791.9	0.30
Deutsche S&P 500 Idx S (SCPIX)	11.5	1.0	8.4	14.2	6.6	896.3	0.34
Dreyfus S&P 500 Idx (PEOPX)	11.3	0.9	8.3	14.1	6.4	2,575.6	0.50
Fidelity 500 Idx Inv (FUSEX)	11.8	1.3	8.7	14.5	6.8	109,233.1	0.09
iShares Core S&P 500 (IVV)	11.9	1.3	8.8	14.5	6.8	90,597.1	0.04
Schwab S&P 500 (SWPPX)	11.8	1.2	8.7	14.5	6.9	23,534.0	0.09
Shelton S&P 500 Dir (SPFIX)	11.9	1.0	8.6	14.3	6.7	149.3	0.36
SPDR S&P 500 ETF (SPY)	11.8	1.3	8.7	14.5	6.8	224,820.2	0.10
SSgA S&P 500 Idx N (SVSPX)	11.7	1.2	8.7	14.5	6.8	1,518.9	0.16
T. Rowe Price Eq Idx 500 (PREIX)	11.7	1.1	8.6	14.3	6.6	28,273.3	0.25
USAA S&P 500 Idx Mbr (USSPX)	11.7	1.1	8.6	14.3	6.7	5,975.3	0.26
Vanguard 500 ETF (VOO)	11.9	1.3	8.8	14.6	—	56,648.3	0.05
Vanguard 500 Idx Adm (VFIAX)	11.9	1.3	8.8	14.6	6.9	282,566.0	0.05
Vanguard 500 Idx Inv (VFINX)	11.8	1.2	8.7	14.4	6.8	282,566.0	0.16
Equal Weighted
Guggenheim S&P 500 Eq Wt ETF (RSP)	14.3	(2.5)	8.3	15.0	7.8	11786.8	0.40
Factor (Smart Beta)
Guggenheim S&P 500 Pure Grth ETF (RPG)	3.8	2.3	6.5	14.8	9.4	1,829.0	0.35
Guggenheim S&P 500 Pure Val ETF (RPV)	19.1	(8.3)	7.0	17.7	7.6	886.4	0.35
iShares S&P 500 Growth (IVW)	6.7	5.3	8.8	14.3	8.1	14,822.9	0.18
iShares S&P 500 Value (IVE)	17.1	(3.2)	8.3	14.4	5.3	12,767.7	0.18
PowerShares S&P 500 High Beta (SPHB)	26.1	(12.7)	7.4	15.5	—	570.5	0.25
PowerShares S&P 500 Low Vol ETF (SPLV)	10.0	4.0	10.3	12.7	—	6,382.6	0.25
PowerShares S&P 500 Momentum (SPMO)	5.4	—	—	—	—	1.3	0.25
PowerShares S&P 500 Value (SPVU)	20.0	—	—	—	—	1.5	0.25
PowerShares S&P 500 Hi Div Lo Vol ETF (SPHD)	22.3	5.2	15.5	—	—	2,789.0	0.30
PowerShares S&P 500 Quality ETF (SPHQ)	14.1	1.6	10.4	15.3	6.2	1,078.2	0.29
ProShares S&P 500 Dividend Aristo (NOBL)	11.4	0.4	8.9	—	—	2,641.6	0.35
Rydex S&P 500 Pure Growth H (RYAWX)	2.5	0.9	5.2	13.3	8.0	53.6	1.51
Rydex S&P 500 Pure Val H (RYZAX)	17.3	(9.6)	5.5	15.8	5.6	68.1	1.50
SPDR S&P 500 Buyback ETF (SPYB)	15.6	—	—	—	—	7.9	0.35
SPDR S&P 500 Growth ETF (SPYG)	6.7	5.3	8.8	14.3	8.4	673.3	0.15
SPDR S&P 500 High Dividend ETF (SPYD)	24.7	—	—	—	—	90.6	0.12
SPDR S&P 500 Value ETF (SPYV)	17.1	(3.2)	8.3	14.4	5.4	290.4	0.15
Vanguard S&P 500 Growth ETF (VOOG)	6.7	5.3	8.8	14.3	—	1,192.2	0.15
Vanguard S&P 500 Value ETF (VOOV)	17.1	(3.2)	8.3	14.5	—	612.1	0.15
Other S&P 500 Funds
Elkhorn S&P 500 Capital Expend (CAPX)	15.4	—	—	—	—	2.7	0.29
Global X S&P 500 Catholic Val ETF (CATH)*	—	—	—	—	—	66.5	0.29
PowerShares S&P 500ex-Rate SnsvLwVtl ETF (XRLV)	11.5	—	—	—	—	178.8	0.25
ProShares S&P 500 ex-Energy (SPXE)	10.5	—	—	—	—	9.2	0.27
ProShares S&P 500 ex-Financials (SPXN)	10.3	—	—	—	—	1.1	0.27
ProShares S&P 500 ex-Health Care (SPXV)	14.1	—	—	—	—	1.2	0.27
ProShares S&P 500 ex-Technology (SPXT)	10.7	—	—	—	—	1.1	0.27
SPDR S&P 500 Fossil Fuel Free ETF (SPYX)	10.9	—	—	—	—	112.5	0.20
*Global X S&P 500 Catholic Values began trading in April 2016. Source: Morningstar. Data as of December 31, 2016.

There is another aspect to expenses: commissions. Most discount brokers offer commission-free exchange-traded funds. These commissions are waived only for the buy and sell transactions; the expense fee is still charged.

The transaction costs associated with mutual funds depends on where and how they are purchased. Though the ETFs are cheaper in terms of expenses, mutual funds allow partial shares to be purchased. This makes the mutual funds preferable for those who are investing regular dollar amounts, such as through a 401(k) or similar workplace retirement plan. Investors making regular contributions to an IRA may also find it preferable to invest in a mutual fund if they can do so without incurring commissions (transaction fees). This avoids having odd amounts of cash sitting on the sidelines because there isn’t enough to buy a full share of an ETF. Discount brokerage firms do offer some mutual funds on a transaction-free basis; check with your broker to see what funds are on the list. It is also possible to invest directly through the mutual fund provider on a transaction-free basis. You will have to open an account with the mutual fund company, however.

As far as choosing between an ETF and a mutual fund, the decision is not completely straightforward. Commission-free ETFs have the advantages of no commission charges and being able to be bought and sold on an intraday basis. The Admiral share version of the Vanguard S&P 500 mutual fund charges 0.05%, which makes it a competitive option. Mutual funds can work well for those who want to accumulate shares in set dollar amounts over a period of time (dollar-cost averaging) or want to avoid having excess investment dollars stay in cash. But the larger the dollar amount invested, the smaller the impact that having a little excess cash sit in the account will matter.

A rule of thumb is to go with the cheapest and easiest-to-purchase option. Traditional S&P 500 index funds are essentially commodity products. Expense ratios for many of these funds are near or below 0.10%.

Going Beyond Traditional Market-Cap Weighting

The aforementioned funds follow the market-cap weighting allocation used by the S&P 500 index. Market-cap weighting assigns the biggest allocations to the largest companies and the smallest allocations to the smallest companies. Proponents argue that market-cap weighting is cheaper and captures the market’s efficiencies. Detractors claim alternative weighting strategies realize better returns.

Just four S&P 500 ETFs use the words “weight” or weighted in their names. Only one weights by market-cap: Guggenheim S&P 500 Equal Weight ETF (RSP). This fund equally allocates to each of the large-cap index’s 500 stocks. Whereas Apple (AAPL) has an approximate 3.24% weighting in the SPDR S&P 500 ETF, its weighting in the Guggenheim fund is just 0.21%, as of January 13, 2016. The Guggenheim fund is rebalanced quarterly.

The alternative weighting has led to higher returns. During the past 10 years, the Guggenheim fund has realized an 7.8% annualized return, compared to a 6.8% annualized return for the SPDR S&P 500 ETF. Better relative returns for smaller large caps will benefit the Guggenheim fund in the future. Higher relative returns for mega-cap companies will favor traditional market-cap-weighted S&P 500 funds. In his book, “Investing at Level3,” AAII founder and chairman James Cloonan says that long-term historical data gives the advantage to the Guggenheim equal-weight fund over the traditional S&P 500 funds.

Factor-Based (Smart Beta) S&P 500 Funds

The majority of the ETFs with S&P 500 in their name weight holdings based on a factor. More commonly referred to as “smart beta” funds, these ETFs are designed to take advantage of a characteristic among stocks shown to lead to higher returns. These characteristics are known as risk factors or anomalies in the industry. The word “anomaly” refers to the capital asset pricing model (CAPM), which holds that a stock’s return is determined by the excess return of the stock market over a risk-free asset adjusted for the beta (relative volatility) of the individual stock. Anomalies, according to professors Eugene Fama and Kenneth French, are patterns in average stock returns that are not explained by CAPM.

A simple example is value. Over the long term, stocks with low valuations (value stocks) have realized higher returns than stocks with high valuations (growth stocks). Six S&P 500 funds weight their holdings on the basis of valuation, with three specifically following the S&P 500 Value index: iShares S&P 500 Value ETF (IVE), SPDR S&P 500 Value ETF (SPYV) and Vanguard S&P 500 Value ETF (VOOV).

S&P Dow Jones Indices splits the S&P 500 (as well as the S&P MidCap 400 and the S&P SmallCap 600) into growth and value subsets. For each index, member stocks are classified as being either growth or value. Value stocks have low price-to-book, price-earnings and price-to-sales ratios. Growth stocks have high three-year increases in earnings and revenues and strong 12-month price momentum. Stocks that fall between the two categories are split between the growth and value categories based on which style they most likely resemble.

Five S&P 500 funds weight their holdings on growth characteristics. Three specifically follow the S&P 500 Growth index: iShares S&P 500 Growth ETF (IVW), SPDR S&P 500 Growth ETF (SPYG) and the Vanguard S&P 500 Growth ETF (VOOG). The other two, Guggenheim S&P 500 Pure Growth ETF (RPG) and Rydex S&P 500 Pure Growth fund (RYAWX), track the S&P 500 Pure Growth index. Their respective counterparts, Guggenheim S&P 500 Pure Value ETF (RPV) and Rydex S&P 500 Pure Value fund (RYZAX), track the S&P Pure Value index.

The aforementioned S&P value and growth indexes do not track the entire S&P 500. Rather, they are designed to give investors exposure to a subset of the large-cap index. The value and growth indexes are allowed to have some overlap, so holding funds tracking both indexes can lead to unintended overweighting of certain stocks. The pure indexes have no overlap, but only cover approximately one-quarter of the S&P 500’s market capitalization each. I purposely focused on these indexes to show how an ETF with S&P 500 in its name may not track the entire large-cap index, much less realize the same returns or volatility.

[The sixth value fund, PowerShares S&P 500 Value (SPVU), tracks the S&P 500 Enhanced Value index. This index tracks the returns of the top 100 stocks within the S&P 500 as defined by their value scores. The scores are calculated based on book value, earnings and sales valuation ratios.]

Beyond growth and value are funds designed to focus on S&P 500 member stocks with lower levels of volatility [PowerShares S&P 500 Low Volatility ETF (SPLV)], stronger price momentum [PowerShares S&P 500 Momentum (SPMO)], dividend growth [ProShares S&P 500 Dividend Aristocrats (NOBL)] and buybacks [SPDR S&P 500 Buyback ETF (SPYB)]. Most of these funds have been around for fewer than 10 years. The decision to allocate to them should be based on the expectation that such funds will be able to achieve outperformance over the long term with the understanding that all return anomalies go through periods during which they underperform.

Other S&P 500 Funds

There are a group of S&P 500 funds that do not fit nicely into any of the aforementioned categories. Some of these are tactical. ProShares offers funds excluding certain sectors, as such as financials [ProShares S&P 500 ex-Financials (SPXN)]. Others are intended for those who desire to incorporate their personal values into their investment strategy, including the Global X S&P 500 Catholic Values (CATH). More than half of these funds have attracted fewer than $10 million in assets, which increases the risk of them being shut down at some point in the future. Furthermore, their unique approaches will result in return characteristics that differ from the S&P 500.

Excluded from this article are leveraged and inverse funds. These funds are very short-term trading vehicles, often intended to be held for no more than one day. They are highly risky and are not intended for an investor seeking exposure to the S&P 500; rather, they are designed for active traders and speculators.

Finding S&P 500 Funds

To identify funds for this article, I searched our Mutual Fund Guide (February 2017 AAII Journal) and our Exchange-Traded Fund Guide (August 2016 AAII Journal) along with data from Morningstar for funds with S&P 500 in their name.

There may well be additional funds in existence that track or use the S&P 500 as a basis for their holdings. Identifying them would require going through factsheets and/or prospectuses on a fund-by-fund basis—a time-consuming process.

There are also “closet-index” mutual funds. These funds are designated as being active, but their returns and volatility are close to that of the S&P 500 when fees are excluded. They have higher expense ratios than the traditional index funds mentioned this article, lessening their appeal. Looking for R-squared values near 1.0 is one way to spot actively managed funds that are likely closet indexers. A traditional S&P 500 index fund will be more attractive to the closet indexers because of its lower expense ratios.

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