30 years later and still on top for SSGA's flagship ETF

The SPDR S&P 500 ETF Trust, the first exchange-traded fund listed in the U.S., turns 30 years old in January, and while it has ceded some asset-share territory to younger rivals, analysts say it remains well ahead of its challengers when it comes to institutions using ETFs to obtain liquidity.

"It's not the cheapest S&P 500 ETF and has lost some market share," said Todd Rosenbluth, New York-based head of research at VettaFi LLC, a data and analytics provider, "but when institutions want large-cap exposure, it remains the go-to vehicle."

Launched in January 1993, State Street Global Advisors' SPDR S&P 500 ETF Trust, known by the ticker symbol SPY, had $366.5 billion in assets under management as of Dec. 6. That was down from SPY's AUM peak of $463.7 billion on Jan. 3.

Competitor BlackRock Inc.'s iShares Core S&P 500 ETF, launched in 2000, had $302.5 billion in assets as of Dec. 6, while the Vanguard S&P 500 ETF, which debuted in 2010, had $278.6 billion in assets as Nov. 30.

The SPDR S&P 500 ETF Trust has a gross expense ratio of 0.09%, while its BlackRock and Vanguard rivals both have 0.03% expense ratios.

Eric Balchunas, Philadelphia- based Bloomberg Intelligence senior ETF analyst, said the three S&P 500 ETFs are engaged in what he likens to a war being fought on both land and sea.

In the "land war" — which involves assets — the BlackRock and Vanguard ETFs are "really stealing from SPY," Mr. Balchunas said.

SPY currently represents about 39% of the combined assets of those three S&P 500 ETFs, down from 77% 10 years ago, he said.

"The land is advisers," he said, adding that for advisers, fees typically matter more than liquidity because ETFs used by advisers tend to be held longer. A fund's expense ratio is an annual fee that's "taken out a little bit every day," said Mr. Balchunas, who likened it to "a termite living in your total returns."

"And so, the smaller the termite, the less it eats away at your total returns," he said.

By contrast, a big institution that perhaps receives a large cash influx might opt to use SPY in order to equitize it before ultimately deploying the money elsewhere, Mr. Balchunas said. For an institution just holding the ETF for three weeks or a month, the fee matters less, he said.

"So, SPY is losing the land war, but it's still holding up on sea," Mr. Balchunas said, adding that it consistently accounts for more than 90% of the trading volume of those three ETFs.

Institutional investors — many of whom used ETFs for the first time in 2008 during the global financial crisis and found them to be liquid, dependable tools — "love liquidity," he said.

"And SPY has oceanic liquidity," Mr. Balchunas said.

The SPDR S&P 500 ETF Trust "is the most liquid ETF based on several observable metrics," including average daily value traded, short interest and options open interest, according to a Sept. 2 SSGA report, "SPY Liquidity: Flexibility to Navigate Any Market."

SPY posted $39.4 billion in average daily volume during the first 11 months of the year, which represented about 88% of all S&P 500 ETF trading, according to SSGA.

"SPY's overall robust liquidity profile provides cost benefits relative to its competitors, regardless of execution strategy implemented," the SSGA report said.

Still, SPY's maritime dominance is unlikely to last forever, Mr. Balchunas said. As the BlackRock and Vanguard S&P 500 ETFs continue to lure assets, it's likely that 10 to 20 years from now one or possibly both will surpass SPY in volume share, ultimately making them both less expensive and more liquid, he said.

"I would say not on my watch," said Hilary Corman, New York-based head of U.S. institutional for SPDR ETFs at State Street Global Advisors. "We are going to actively try to show people why she is better."

SPY is the "most efficient and the best product to use when looking for exposure to the S&P," Ms. Corman said, adding that its edge vs. the competition boils down to what she described as the "three Ls" — liquidity, lending and lower transaction costs. Those are the three things SPY offers "that nobody else can compete with," she said.

For institutional investors, it's "vital" to look beyond the expense ratio and determine what the securities lending potential is and what the actual transaction costs are before deciding which product to use, she said.

"We work out that owning SPY is actually cheaper than owning IVV or VOO when you bring in these other … positives in lending and lower transaction costs," Ms. Corman said, referring to the BlackRock and Vanguard funds by their ticker symbols.

When it comes to gross return on lendable assets, "for SPY, you can be getting like 7.5 basis points for that, whereas IVV and VOO are much, much less," she said.

Mr. Balchunas agreed with Ms. Corman's comments regarding SPY when it comes to institutions.

"And I think that's why you do see the volume hold up after all these years," he said, adding, however, that advantages involving securities lending and liquidity aren't things that "quite apply to the adviser and long-term investor."

"And that's part of the issue," he said. "At some point, those adviser dollars are going to create so much volume, that it will ultimately suck over some institutions who may actually be like 'Well, all else equal I'll go with the cheaper expense ratio.'"

To make sure investors understand the benefits of SPY, "we're growing our institutional sales force," Ms. Corman said. SSGA will continue to invest in SPY, she said.

"She's super important to us," Ms. Corman said, adding, "I think she's got room for growth as we talk to more people about this, I really do – I don't want her to lose any more market share."