Morningstar - Q2 2023 - 7

-0.75
-1.50
EXHIBIT 2 1993
available in 1993 that had survived, while only
24% of those funds remain open today. SPY jumps
up to the top sixth percentile of funds since its
inception after accounting for those that died. Its
performance went a long way in grabbing
investors' attention and building their trust in ETFs.
Passive funds like SPY remain a high hurdle
for active managers. The 10-year success rates of
active funds in the large-blend Morningstar
Category over the average passive peer tend
to hover around 10%. And some of those active
managers failed hard. Over the past 10 years,
nearly 40% of active funds alive at the start
of the period had to close shop. Of the 60% that
survived, many underperformed their average
passive counterpart by a significant margin.
A low fee and low transaction costs played
a big part in SPY's success. The impact
of transaction costs is hard to quantify, but
market-cap weighting assists the effort. The
weight of each stock in SPY's portfolio fluctuates
with price changes, which reduces turnover
and the need to trade. Expense ratios more
clearly highlight SPY's advantage. The average
U.S. equity fund charged 1.16% annually
in 1993, a far cry from SPY's initial fee of 0.2%.
SPY, among other index funds, helped initiate
the price wars that continue today.
SPY's Lasting Legacy
SPY remains the largest ETF, with more than
$375 billion in net assets, despite cheaper S&P 500
trackers available to investors. SPY alone would
register as the fourth-biggest ETF issuer by net
assets-a big reason it remains popular with
traders. SPY traded over 20 times more shares per
day than Vanguard S&P 500 ETF VOO, on average,
cementing its prominence in the trader's tool
chest ( EXHIBIT 3 ).
SPY also leads ETFs in options volume. And
its options aren't strictly used by traders. Other
ETFs use them for option overlays, and
they're even used to price MIAX's Spikes Volatility
Index, a competitor of the VIX.
SPY's lead in assets is eroding, as broad market
index funds by Vanguard and iShares begin to nip
at its heels. What was once new has become
1999
2005
2011
2017
2022
Investors Choose ETFs In 2021, net inflows into ETFs surpassed mutual funds for
the first time.
$6.0T
ETFs
4.5
3.0
1.5
1993
1999
Source: Morningstar Direct. Data as of Dec. 31, 2022.
2005
2011
2017
2022
Open-End
Mutual Funds
EXHIBIT 3
A Trader's Tool SPY's daily dollar volume is much higher than other
S&P 500-tracking ETFs.
Name
SPDR S&P 500 ETF Trust SPY
IShares Core S&P 500 ETF IVV
Vanguard Total Stock Market ETF VTI
Vanguard S&P 500 ETF VOO
Invesco QQQ Trust QQQ
Vanguard FTSE Developed Markets ETF VEA
Vanguard Value ETF VTV
IShares Core MSCI EAFE ETF IEFA
Vanguard Total Bond Market ETF BND
IShares Core US Aggregate Bond ETF AGG
Source: Morningstar Direct. Data as of Feb. 1, 2023.
Net Assets ($Bil)
379.95
307.34
280.58
279.26
156.03
109.45
104.79
96.54
88.41
86.74
5-Year Net Flow
($Bil)
-3.59
77.09
129.58
132.97
41.37
39.13
47.79
51.69
61.26
41.33
3-Month Avg. Daily
Dollar Volume ($Bil)
32.06
1.77
0.82
1.46
14.43
0.65
0.42
0.82
0.49
0.79
an artifact of another time. SPY is structured as
a unit investment trust, which comes with
limitations that don't affect its closest competitors.
Portfolio managers cannot reinvest dividends
or use derivatives to equitize cash, and they
are prohibited from engaging in securities lending
to generate additional income to offset expenses.
The ETF that set the tone for low-cost investing
also comes with a fee of 0.095%, which is multiple
times higher than its top competitors. For
these reasons, it's a substandard option compared
with other top S&P 500 ETFs.
But SPY's achievements blazed the trail for other
ETFs and led to further innovation. While
investors will continue to pivot away from SPY,
its integration in financial markets will keep
it highly relevant for the foreseeable future. K
Bryan Armour is director of passive strategies research
for North America at Morningstar Research
Services LLC. He is a member of the editorial board
of Morningstar magazine.
morningstar.com/products/magazine
7
Cumulative Net Flows
https://www.morningstar.com/etfs/arcx/voo/quote https://www.morningstar.com/authors/2488/bryan-armour http://www.morningstar.com/products/magazine
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