3 Low-Cost Options for Tracking the S&P 500

Mike Rawson: There are three ETFs that track the S&P 500 Index. All three offer low-cost and tight tracking to the S&P 500, but there are some subtle differences. SPDR S&P 500 (SPY) is the oldest and most liquid U.S. ETF, and it has the most liquid options market among the three. SPY is structured as a unit investment trust, which prohibits it from reinvesting the dividends it receives. This creates a cash drag when prices are rising. SPY is also not allowed to engage in securities lending--a technique many funds use to generate extra income that can be used to defray the cost of replicating an index.

In contrast to SPY, iShares Core S&P 500 (IVV) and Vangaurd S&P 500 (VOO) are set up as regulated investment companies, a more flexible legal structure that allows reinvesting dividends and securities lending. While iShares' IVV is a stand-alone exchange-traded fund, Vanguard's VOO is a separate share class of a mutual fund. VOO also has the lowest expense ratio of the three, and this has given it a slight performance edge since its inception.