Why You Can Do Better Than the SPDR S&P 500 ETF Trust

SPDR S&P 500 ETF Trust (NYSEMKT: SPY) will always have a special place in the history of Wall Street. That’s because the exchange-traded fund (ETF) was the first of its kind. But the ETF market has changed dramatically over the years and, today, investors can easily do better than SPDR pioneering ETF.

Here’s why — and a look at a few of the more attractive alternatives.

Without getting into the details of why exchange-traded funds were such an innovative investment tool, you can pretty easily explain what this SPDR ETF does. It buys the stocks in the S&P 500 index (SNPINDEX: ^GSPC). An index fund isn’t a unique thing, and it wasn’t unique when the ETF was introduced to the world. What was different was the ability to trade SPDR S&P 500 ETF Trust all day long.

Unlike index-based mutual funds, which have existed for years, ETFs trade just like stocks. That materially increases the flexibility that investors have with their portfolios. And it also opens up all sorts of other investment tactics, such as shorting and options strategies, around the ETF. In this way, SPDR S&P 500 ETF Trust represented a revolutionary change for Wall Street.

But, at its core, SPDR S&P 500 ETF Trust is still just an index fund that tracks the S&P 500 index

. On an absolute basis, it remains a fairly low-cost way to do that, too, with an expense ratio of just 0.09%. On a relative basis, however, that’s actually kind of expensive today.

The low costs offered by exchange-traded funds have attracted a huge number of investors. Because many ETFs are doing nothing more than tracking similar indexes, meanwhile, one of the best ways to differentiate an ETF is by offering lower costs. That has resulted in a race to the bottom expense ratio-wise concerning widely followed indexes. The S&P 500 index is, perhaps, the most widely followed index in the world, and there are many different choices for investors if they want to invest in it.

For example, Vanguard S&P 500 ETF (NYSEMKT: VOO) also tracks the S&P 500 index, but its expense ratio is 0.03%. That’s the same amount you’ll pay to own iShares Core S&P 500 ETF (NYSEMKT: IVV), another S&P 500 index tracker. And even Vanguard 500 Index Fund, a traditional mutual fund, has a lower expense ratio than SPDR S&P 500 ETF Trust, at 0.04%.

Given the plain vanilla approach taken by SPDR S&P 500 ETF Trust, the ETF’s expense ratio is extremely high relative to similar products. And that means there’s no particularly good reason to buy it. Unless you feel there’s some cache in saying you are overpaying to own the first ETF ever to be created, you should probably look elsewhere if you want a fund that tracks the S&P 500 index.