Exploring low-cost versions of popular ETFs

State Street: SPY ETF

State Street offers the very popular SPDR S&P 500 ETF Trust (SPY). SPY is the largest and most liquid ETF in the world, with an astounding $358 billion in assets under management (AUM) and millions of shares traded monthly. The ETF has a highly developed options chain and is a favorite for day and swing traders. That being said, as a long-term passive buy-and-hold investment, SPY isn't the best option. The ETF currently charges an expense ratio of 0.09%, which is higher than the industry lowest of 0.03%. Fortunately, State Street released the SPDR Portfolio S&P 500 ETF (SPLG).

SPLG holds the exact same assets as SPY does. It is identical in every single way in terms of holdings and composition. The difference is in the expense ratio, which is significantly lower at 0.03%. As well, SPLG trades for just $46.46 per share at the time of writing, compared to SPY at $396.42. This makes it more accessible for investors with a smaller portfolio. 

The downside is a less developed options chain. This means wider bid-ask spreads for options and fewer selections for strike prices and expiry dates. However, for the average index investor this is not a concern. Traders can still make use of SPY as their holding period is so short that the higher expense ratio isn't an issue. 

Invesco: QQQ ETF

Invesco manages the highly popular Invesco QQQ Trust Series 1 (QQQ). If SPY is State Street's flagship fund, then QQQ is Invesco's. QQQ tracks the NASDAQ 100, a very popular choice among traders and investors alike. Like SPY, QQQ has a very high AUM ($164 billion) and a high volume traded daily. The ETF also has a strong options chain thanks to its high implied volatility. 

However, QQQ is expensive for a vanilla index ETF, costing an expense ratio of 0.20%. This is as expensive as some actively managed factor funds out there. However, having recognized that some investors want to buy and hold the NASDAQ 100 long-term, Invesco released the Invesco NASDAQ 100 ETF (QQQM) as an alternative.

Like QQQ, QQQM also tracks the NASDAQ 100. The funds are identical in terms of holdings and composition. The difference is once again in the expense ratios – QQQM is 0.05% less at 0.15%. In exchange, you have a less developed options chain, but as mentioned earlier this is not a concern for long-term buy-and-hold investors. 

Which ETF to buy?

Both SPLG and QQQM are great lower-cost alternatives to SPY and QQQ. If you're not into day or swing-trading, you can forego the lower bid-ask spreads and better options chains of SPY and QQQ to save on the expense ratios. While it might not seem like much, the few percentages you save can make a big difference over the long term, especially as your portfolio grows larger. If you're curious about the differences between the S&P 500 and NASDAQ 100, I suggest giving this article a read. 

Please note this article is for information purposes only and does not constitute investment advice.