If you own an S&P 500 fund, you probably think the choice doesn’t matter much. They all hold the same 500 stocks. They all track the same index. They all deliver roughly the same returns.

A fresh analysis from Morningstar explains exactly where that cost sits, why it compounds over decades, and which alternatives give you more of your own money back.

The difference is small in any single year. Over a career of investing, it’s anything but.

SPY charges more than three times what its closest rivals do

The SPDR S&P 500 ETF Trust, known as SPY, is the oldest ETF in America. State Street launched it in January 1993. It now holds roughly $698 billion in total assets, according to Yahoo Finance data.

SPY charges an expense ratio of 0.0945%. That sounds tiny. But Vanguard’s S&P 500 ETF (VOO) charges just 0.03%. Fidelity’s 500 Index Fund (FXAIX) charges 0.015%. State Street’s own SPDR Portfolio S&P 500 ETF (SPYM) undercuts SPY, too.

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Through February 2026, SPYM had the best 10-year annualized return among S&P 500 trackers. SPY did not.

Why SPY costs more, despite tracking the exact same index

SPY’s higher fee is a relic of its structure. The fund is organized as a unit investment trust (UIT), not a standard ETF. That legal structure, established in 1993, limits State Street’s ability to optimize the fund the way competitors can.

The UIT wrapper prevents SPY from reinvesting dividends between quarterly payouts. Modern ETFs like VOO reinvest immediately. That lag creates a small performance drag, especially in rising markets.

What SPY’s structure means for your returns:

  • SPY cannot reinvest dividends in real time. VOO and IVV can.
  • SPY’s expense ratio is more than 3x higher than VOO’s.
  • SPY’s unit investment trust structure is locked. It cannot be changed.
  • State Street launched SPYM as a cheaper alternative under a modern ETF structure.

SPY survives on something else entirely: trading volume. Its dollar-volume was more than eight times that of VOO over the three months through February 2026, Morningstar found.

Institutional traders and market makers need that liquidity. Long-term investors like you do not.

SPY charges an expense ratio of 0.0945%, higher than its competitors.

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The real dollar cost of picking the wrong S&P 500 fund

A 0.06 percentage-point fee gap may sound trivial. It is not, once you let compounding do the math over a full investing career.

How fees stack up on a $100,000 investment over 30 years:

  • SPY at 0.0945%: roughly $2,835 paid in fees alone
  • VOO at 0.03%: roughly $900 paid in fees
  • FXAIX at 0.015%: roughly $450 paid in fees

That’s before accounting for the return drag. When you pay more, you compound less. Over three decades, the gap between SPY and FXAIX grows beyond fees alone because every dollar lost to expenses is a dollar that never earns a return.

This is not an argument against SPY for day traders. If you’re moving in and out of positions within hours, SPY’s deep liquidity saves you money on bid-ask spreads. But if you’re buying and holding for retirement, you’re paying a premium for a feature you’ll never use.

ETFs vs. mutual funds in taxable accounts

Fees matter everywhere. But the vehicle type matters most in a taxable brokerage account. If you invest outside a 401(k) or IRA, the tax treatment of your S&P 500 fund deserves close attention.

ETFs use an in-kind creation and redemption process that generally avoids triggering capital gains distributions. Morningstar notes that none of the four major S&P 500 ETFs have paid capital gains in the past 10 years.

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  • Taxable brokerage: Choose an ETF (VOO, IVV, or SPYM). The tax efficiency edge is real and measurable.
  • IRA or 401(k): The vehicle type barely matters. ETFs and mutual funds perform nearly identically when distributions are reinvested.
  • Capital gains: Mutual fund S&P 500 options distribute small but nonzero capital gains. You owe taxes on those, even if you never sold a share.

The taxable account decision tree: Fidelity 500 Index (FXAIX) is available to any investor with no minimum. It charges just 0.015%. If your retirement plan offers it, you already have one of the cheapest options available anywhere.

Morningstar’s top S&P 500 fund picks for long-term investors

Morningstar ranked S&P 500 trackers by expense ratio, tracking error, and long-term performance. The lowest fee almost always won. Here are the standouts for different investor types.

  • Vanguard S&P 500 ETF (VOO): 0.03% expense ratio. Gold-rated by Morningstar.
  • iShares Core S&P 500 ETF (IVV): 0.03% expense ratio. Neck-and-neck with VOO on volume.
  • SPDR Portfolio S&P 500 ETF (SPYM): among the lowest fees. Best 10-year annualized return through Feb. 2026.
  • Fidelity 500 Index (FXAIX): 0.015%. The cheapest mutual fund option for any investor.

Check the expense ratio on your plan’s fund fact sheet before making changes.

The bigger risk hiding inside every S&P 500 fund

Fees are one problem. Concentration is another. Every market-cap-weighted S&P 500 fund carries the same portfolio tilt: The top 10 holdings now represent roughly 36% to 40% of total assets.

Morningstar analyst Brendan McCann noted that technology stocks make up about 35% of the index, higher than during the dot-com bubble peak. That’s not a design flaw. It’s simply what the market looks like right now. But it means your “diversified” fund is more concentrated than you might expect.

  • A sharp sell-off in mega-cap tech stocks (Nvidia, Apple, Microsoft, Amazon) would hit every cap-weighted S&P 500 fund hard.
  • Equal-weight alternatives like Invesco S&P 500 Equal Weight ETF (RSP) spread exposure more evenly, but historically lag in bull markets.
  • In 2022, when tech fell sharply, the equal-weight approach outperformed by nearly 8 percentage points.

How to pick the right S&P 500 fund for your situation

You don’t need to overthink this. The differences between top-tier S&P 500 funds are small. But small differences compound over time. Here’s a practical framework.

  • Start with the expense ratio: Below 0.05% is excellent. Above 0.10% means you’re overpaying relative to peers.
  • Check whether you’re in a taxable or tax-advantaged account. In a taxable account, ETFs beat mutual funds on tax efficiency.
  • Look at your 401(k) lineup. If your employer offers an institutional S&P 500 fund at 0.01 to 0.03%, stick with it.
  • Ignore trading volume unless you’re an active trader. Liquidity premiums help traders, not retirement savers.
  • Don’t switch existing holdings just to save 0.03%. The tax hit from selling may exceed years of fee savings.

Your decision checklist: Morningstar makes one point clearly: Among top-tier funds, the differences are slight.

But if you’re starting fresh or adding new money, choosing the cheapest fund is the single most reliable way to improve long-term returns.

One popular “free” fund that isn’t what it seems

Fidelity ZERO Large Cap Index Fund charges a 0.00% expense ratio. That sounds unbeatable. But there’s a catch. The fund does not actually track the S&P 500, but follows a proprietary Fidelity index.

Morningstar flagged a meaningful gap. When the S&P 500 gained 28.7% in one year, the Fidelity ZERO fund returned 26.7%. That’s a 2-percentage-point shortfall. Morningstar called it “an unpleasant surprise for those who had not been paying attention.”

Here’s the lesson to note: A 0.00% expense ratio doesn’t help if the underlying index delivers inferior returns. Always check what benchmark a fund actually tracks before assuming it’s equivalent to the S&P 500.

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