Vanguard’s VOO Dethrones SPY as the Largest ETF Amid a Cutthroat Fee War and Power Shift in Investing

Vanguard’s VOO Overtakes SPY: What It Signals for the Future of ETFs

Vanguard’s Low-Cost Juggernaut Reshapes the ETF Market

Vanguard’s flagship S&P 500 ETF, known as VOO, has officially surpassed State Street’s SPY to become the world’s largest exchange-traded fund. As of early U.S. trading, VOO held approximately $631.8 billion in assets, edging past SPY’s $630.3 billion. While this milestone is a headline-worthy event, the underlying factors driving this shift reveal a larger, industry-wide transformation—one that is fundamentally reshaping the ETF market.

The Numbers Behind the Transition

• VOO’s Rapid Inflows: Over $23 billion has flowed into VOO this year alone, accelerating a trend that saw it catch up to SPY much faster than expected. In comparison, SPY has faced net outflows of $16 billion.
• A Multi-Year Catch-Up: At the start of 2022, VOO trailed SPY by $182 billion. As recently as November, it was still $50 billion behind before surpassing BlackRock’s IVV to claim the second spot.
• Wall Street’s ETF Boom: The broader ETF market has crossed $10 trillion in total assets, with U.S. equity-tracking funds benefiting the most. U.S. stocks now make up 60.5% of global market capitalization—the highest level since 1973.

Why Investors Are Choosing VOO Over SPY

1. The Power of Low Fees

Cost efficiency is the defining feature of Vanguard’s rise. VOO charges an industry-leading 0.03% expense ratio, significantly lower than SPY’s 0.0945%. Over time, this cost advantage compounds, making VOO the preferred choice for long-term, buy-and-hold investors.

2. A Shift in Investor Behavior

SPY remains dominant among traders due to its superior liquidity and leverage options, but VOO is winning over investors who prioritize stability and long-term gains. With an increasing number of retail investors favoring passive, cost-efficient strategies, SPY’s higher expense ratio has become a liability.

3. Vanguard’s Structural Advantage

Vanguard is the only asset manager authorized by the U.S. Securities and Exchange Commission to operate an “ETF-as-a-share class” structure. This allows its mutual fund investors to seamlessly convert their holdings into ETFs, a model that naturally directs assets toward VOO.

Industry-Wide Implications: What This Means for the ETF Market

1. The Intensifying Fee War

State Street and other asset managers have already responded with aggressive price cuts. In 2023, State Street slashed the fee on its SPDR Portfolio S&P 500 ETF to just 0.02%, undercutting Vanguard. However, SPLG has only accumulated $58 billion, indicating that fee reductions alone may not be enough to shift investor preference away from established giants like VOO.

The race to zero fees is accelerating. As passive ETFs continue to dominate inflows, asset managers must rethink how they generate revenue. This may lead to:

• Increased adoption of performance-based pricing models.
• New hybrid ETFs combining passive and active strategies.
• Greater reliance on securities lending to offset declining fee income.

2. Institutional Influence vs. Retail Dominance

SPY has historically been the go-to ETF for institutions due to its deep liquidity and trading efficiency. However, the rise of VOO underscores a power shift in the ETF industry—one that is increasingly being driven by retail investors.

Retail investors, who prioritize low-cost, passive vehicles, are dictating market flows in a way that was previously dominated by institutional trading. This trend could signal:

• A decline in active trading strategies reliant on high-cost ETFs.
• A shift in institutional portfolios toward lower-fee, retail-favored funds.
• Potential challenges for asset managers that depend on high-turnover trading models.

3. Market Concentration and Systemic Risks

With a handful of ultra-low-cost ETFs amassing the majority of passive investment flows, questions about market concentration and systemic risk are surfacing. If Vanguard, BlackRock, and State Street collectively control an overwhelming share of equity ETFs, concerns could emerge about:

• Liquidity risks in market downturns if large-scale redemptions occur.
• Potential regulatory scrutiny over index fund dominance.
• Market distortions due to excessive capital concentration in passive strategies.

While ETFs are generally seen as a stabilizing force, their growing influence raises the question: what happens when too much capital is concentrated in too few funds?

The Future of ETFs

• Fee Compression Will Continue: As investors demand lower costs, expect further downward pressure on ETF expense ratios. The winners will be those with scale and distribution power.
• Hybrid Models Could Gain Traction: Active-passive hybrids may emerge as asset managers seek ways to differentiate themselves beyond just cost.
• Regulatory Scrutiny May Increase: As a few asset managers gain outsized influence over equity markets, expect regulators to take a closer look at ETF industry dynamics.

Vanguard’s milestone is more than just a shift in rankings—it marks a fundamental transformation in how investors allocate capital. The battle for ETF dominance is far from over, but one thing is clear: the industry is evolving, and low-cost passive investing is leading the charge.