The SPDR S&P 500 Trust (SPY) has always been the world's largest exchange-traded fund. Now it's moving closer to becoming the world's largest fund, period.
A surging U.S. stock market and recent inflows have made SPY the second-largest fund in the world, at $200 billion. Its assets recently topped those of the Pimco Total Return Fund (PTTRX), which is down to $171 billion in the wake of Bill Gross's exit. The largest fund in the world: the Vanguard Total Stock Market Index Fund (VTSMX), at $321 billion.*
Of the 50,000-plus mutual funds, hedge funds and ETFs in the world, Vanguard holds three of the top five spots. SPY captured the No. 2 spot without being in any 401(k) plans, which are a big and steady flow for many funds. It's a favorite of both long-term investors and short-term traders, and a good example of how an ETF can work for all kinds of investors with all kinds of goals. There are no share classes or different cost structures in the ETF world — everyone pays the same fee. SPY's investors include everyone from Bridgewater Associates LP to Dartmouth College to Treasury Secretary Jack Lew to grandmothers.
Despite some dramatic daily flows and trading, the bulk of SPY's assets are very much long-term money. Assets have risen from $50 billion to $200 billion over the past decade. About $55 billion of that increase is from its 110% return. The rest — about $95 billion — is from new investments. That 10-year inflow is at least double that of any other ETF. These numbers fly in the face of the notion that SPY assets are all short-term, hot money.
Long-term investors see that SPY beats anywhere from 50% to 80% of large-cap stock managers, depending on the year, while charging a small fraction of what they charge. For every $10,000 invested in SPY, you pay $9.50 in annual fees. That compares with a minimum of $80 to $150 for a mutual fund or hedge fund.
On the other end of the spectrum, traders love SPY for its liquidity. It is the most traded security on the planet. In the past month, it has traded an average of $27 billion of shares each day. That's three times as much as Apple Inc. (APPL), the second-most-traded security in the world. SPY trades more each day than the top 10 most-traded stocks combined. It also accounts for about 20% of the equity options market.
SPY does have a significant weakness. It underperforms its peers, albeit not by much. In the past three years, SPY has gained 84.5%, which is 0.40% less than the iShares S&P 500 ETF (IVV) and 0.60% less than the Vanguard S&P 500 ETF (VOO). The main reason is its structure. IVV and VOO are open-end funds, like the majority of ETFs and mutual funds. SPY is a unit investment trust (UIT). SPY, along with some of the oldest ETFs, were created as UITs back in the early '90s, when it was the only structure acceptable to the Securities and Exchange Commission.
The most notable impact of SPY's different structure is that dividends can only be reinvested quarterly, whereas open-end funds can reinvest daily. Also, a UIT cannot lend out securities to short sellers and collect a fee. Such securities lending can bring a tiny bit of revenue that goes back into the fund and helps performance. And finally, there's SPY's slightly higher expense ratio.
VOO and IVV have also been raking in cash. In the past three years, the top three ETFs by inflow are the three that track the S&P 500. This is why SPY's ascent to the world's second-largest fund is that much more impressive. It did it with some serious competition from ETFs launched by the world's two biggest ETF issuers.
With Bill Gross out of the picture, and active management of mutual funds falling out of favor, the only thing stopping Vanguard from total world domination may be the everything-to-everyone SPY.
* This asset figure is just for the mutual fund and does not include Vanguard Total Stock Market ETF's assets. Vanguard has a unique patent in which the ETF is a share class of its mutual fund. No other company does this. Either way, the order of the top 5 funds by asset size wouldn't change. The only difference is that VTSMX would have $369 billion in assets instead of $321 billion.