Index Funds and ETFs: What Actually Differs
Three S&P 500 funds track at 0.999 to each other. Since the exposure is identical, the decision is about everything else.
An index fund holds what an index says to hold. An ETF is a wrapper that trades on an exchange. The two are usually discussed as if choosing between them were the hard part; it is not. The hard part is that a dozen funds track the same index, and working out what separates them.
How close is "tracks the same index"?
Close enough that the question answers itself. These are the securities most correlated with SPY over the past year, measured from daily returns:
| Ticker | Correlation with SPY |
|---|---|
| SPYM State Street SPDR Portfolio S&P 500 ETF | 0.9996 |
| VOO Vanguard S&P 500 ETF | 0.9996 |
| IVV iShares Core S&P 500 ETF | 0.9992 |
| VV Vanguard Morningstar Large-Cap ETF | 0.9980 |
| BBUS JPMorgan BetaBuilders U.S. Equity ETF | 0.9977 |
| IWB iShares Russell 1000 ETF | 0.9974 |
A correlation of 0.9996 means that on essentially every day, these move together. Whatever separates them, it is not what you own. So the choice is decided by the things that are genuinely different, and those are unglamorous.
What is genuinely different
- Expense ratio. The fee, taken daily from the fund's assets. On identical exposure this compounds directly against you: a gap of 0.06% a year is 0.6% of the position over a decade, before any compounding on the difference.
- Spread and liquidity. The gap between bid and ask is a cost paid on the way in and again on the way out. It matters in inverse proportion to how long you hold: irrelevant over twenty years, dominant if you trade monthly.
- Structure and tax treatment. ETFs can usually hand appreciated shares to market makers instead of selling them, which limits the capital gains distributed to holders. Traditional mutual funds often cannot, and in a year of heavy redemptions that produces a taxable gain you did not ask for.
- What the index actually is. The S&P 500 is not "the 500 biggest US companies" — it is a committee's selection with profitability requirements. A total-market fund holds thousands more. Two funds tracking different indices are a real choice; two tracking the same one are not.
Where the correlation stops being 0.999
Move away from the headline index and the picture changes. Sector and thematic funds that sound similar are not always similar:
| Ticker | Volatility | Beta vs SPY | Correlation vs SPY |
|---|---|---|---|
| SPYS&P 500 | 13.0% | 1.00 | 1.000 |
| QQQNasdaq 100 | 19.9% | 1.43 | 0.929 |
| IWMSmall caps | 18.7% | 1.18 | 0.823 |
| XLFFinancials | 14.7% | 0.61 | 0.539 |
| VNQReal estate | 13.7% | 0.31 | 0.294 |
| TLTLong Treasuries | 9.3% | 0.19 | 0.263 |
Volatility and market sensitivity vary far more across index families than within one.
Two funds with the same label can hold quite different things. The test is not the name, it is whether they move together — which you can check for any pair in the correlation finder.
The practical order
Decide the exposure first: which index, and why. That is the decision that determines the outcome. Only then pick the cheapest, most liquid fund that tracks it, because at that point the funds are interchangeable and you are shopping on price.
The common mistake is the reverse — agonising over which S&P fund to hold, having never asked whether the S&P is the right exposure. The first question is worth hours. The second is worth about a minute with an expense-ratio table.
Figures on this page are measured from daily returns over the year to 2026-09-22, across 5,262 liquid US securities, and are rebuilt nightly.
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