Why the SPDR S&P 500 ETF Trust (SPY) Remains the King of ETFs

Unparalleled liquidity

In understanding ETF liquidity, it's essential to look beyond just trading volume. Liquidity in ETFs involves two layers: the volume of the ETF itself and the liquidity of the underlying assets it holds. Both aspects are crucial when evaluating an ETF's overall liquidity profile.

When comparing SPY

and VOO

VOO

-1.53%

, both ETFs are equally matched regarding the liquidity of their underlying assets, as each holds the same widely traded S&P 500 stocks. However, SPY consistently manages to edge out VOO in terms of trading volume.

According to ETF Central's comparison tool, over the past 30 days, VOO traded an average of 4,377,160 shares per day, while SPY traded a staggering 42,632,015 shares per day. This significant difference in trading volume—a factor of nearly 10 times—highlights SPY's superior market presence.

This higher trading volume for SPY translates into a more favorable bid-ask spread, which is an indirect indicator of liquidity. SPY boasts a 30-day average median bid-ask spread of just 0.003%, compared to VOO's 0.005%.

While these differences might seem negligible for retail investors, it's a critical factor for institutional investors, for whom even small percentage differences can represent substantial amounts of money. This efficiency in trading and cost-saving is why many institutional investors may continue to prefer SPY.

Options trading versatility

SPY is also the undisputed king of ETFs when it comes to options trading, to the extent that some investors prefer trading SPY

options over those of the S&P 500 index (SPX) itself. While IVV and VOO

VOO

-1.53%

also offer options trading, they are not nearly as popular as those for SPY. To illustrate, let's examine a few key reasons using IVV

IVV

-1.54%

as an example.

Firstly, SPY is one of the few ETFs that offer options with daily expirations. This frequency is highly valued by institutional traders because it allows for more precise timing and flexibility in hedging strategies or capitalizing on short-term market movements. In contrast, IVV options are typically available on a weekly basis, which can limit strategic flexibility.

In addition, the options chain for SPY includes a much wider array of strike prices, allowing traders to fine-tune their positions with greater specificity. This variety can be crucial for implementing complex trading strategies or for better alignment with specific market outlooks. On the other hand, IVV options have fewer strike prices available, which can restrict trading choices.

Finally, SPY consistently exhibits higher open interest in its options compared to IVV. Open interest represents the total number of outstanding options contracts that have not been settled. High open interest indicates more liquidity, making it easier to enter and exit positions.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.