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By Ben Johnson, CFA | 02-20-2014 12:00 PM

Morningstar Minute: Our Favorite S&P 500 ETF

Among the several competing players, one particular S&P index tracker stands out with its lower fees and flexible structure.

The Morningstar Minute is our quick take on investments, the market, economic indicators, and more. Join us every day for fresh insights from our analyst team.

Ben Johnson: Much in the same spirit as Spy vs. Spy, today we're going to talk about an ETF versus ETF face-off. And coincidentally one of the ETFs that we will be talking about has the ticker SPY, the granddaddy of all ETFs.

Now the SPDR S&P 500 ETF is one of the most heavily traded securities on the planet. At 9 basis points, it's extremely low-cost. But is it really the best option for investors looking for a large-cap portfolio of U.S. equities, and is it the best option for investors seeking exposure to the S&P 500 index?

SPY is structured as a unit investment trust, and as such it cannot reinvest income in the form of dividends, and it cannot lend out its portfolio securities. Now this encumbers its ability to efficiently track its index relative to its chief competitors. Our choice amongst its chief competitors of which there are two--the iShares S&P 500 ETF, ticker IVV, and the Vanguard S&P 500 ETF, ticker VOO--is the Vanguard S&P 500 ETF, again ticker VOO.

Vanguard benefits from having a more modern legal structure that does allow for the reinvestment of dividend payments and does allow for securities lending which results in superior tracking performance. Additionally, the Vanguard S&P 500 ETF has a lower fee at 5 basis points. and in indexing every basis point counts. Our pick for S&P 500 exposure in ETF form is the Vanguard S&P 500 ETF, ticker VOO.

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