If You Own SPY, Schwab’s Large-Cap ETF Costs $60 Less a Year on $100K

Investors looking for large-cap exposure through exchange-traded funds (ETFs) may find significant savings by considering the Schwab U.S. Large-Cap ETF (SCHX) over the more popular SPDR S&P 500 ETF Trust (SPY). SPY, which has been available since 1993, charges an annual expense ratio of 0.09%, translating to approximately $90 per year on a $100,000 investment. In contrast, SCHX has a much lower expense ratio of 0.03%, resulting in an annual fee of about $30 for the same amount. This creates a difference of roughly $60 each year between the two funds.

Both ETFs provide investors with access to large-cap stocks, but they track different indices, which can lead to varying performance outcomes. SPY follows the S&P 500 index, a benchmark that represents the 500 largest publicly traded companies in the U.S. This index is often regarded as a standard for the overall stock market. On the other hand, SCHX aims to replicate the performance of the Dow Jones U.S. Large-Cap Total Stock Market Index, which encompasses a broader range of large-cap companies beyond just the S&P 500.

Due to the differences in the indices they track, the annual returns of SPY and SCHX may not align perfectly. Investors who specifically need to match the performance of the S&P 500 for their investment strategies may prefer SPY, as it provides a more precise tracking of that benchmark.

For those investing in taxable accounts, it is essential to consider the implications of capital gains taxes when switching between funds. Selling SPY to invest in SCHX could incur capital gains taxes that might negate the potential savings from the lower fees. However, for individuals using tax-advantaged accounts such as IRAs or 401(k)s, selling SPY and purchasing SCHX can be done without immediate tax consequences. This allows investors to capitalize on the cost savings without incurring additional tax liabilities.

While the annual savings of $60 may seem modest in the context of a $100,000 investment, over time, these savings can accumulate, especially for long-term investors. The difference in fees could lead to a more considerable impact on the overall growth of an investment portfolio when compounded over many years.

Ultimately, the choice between SPY and SCHX will depend on individual investment goals, tax situations, and preferences for index tracking. Investors should weigh the benefits of lower fees against the need for precise tracking of the S&P 500 when making their decisions. As the investment landscape continues to evolve, understanding the nuances of different ETFs can help investors make informed choices that align with their financial objectives.