Investing in exchange-traded funds (ETFs) is a popular way to diversify one’s portfolio and gain exposure to various market segments. However, not all ETFs are created equal, and some may offer higher returns or lower risks than others. In this article, we will compare two ETFs that track the performance of the S&P 500 index, the most widely followed benchmark for the US stock market: Vanguard S&P 500 ETF (VOO) and ProShares Ultra S&P 500 (SSO).
What are VOO and SSO?
VOO and SSO are both passive ETFs, meaning that they aim to replicate the performance of the underlying index as closely as possible, without active management or stock selection. VOO is a low-cost ETF that charges an annual fee of 0.03%, and has over $196 billion in assets under management. It was launched in September 2010 by Vanguard, one of the largest and most reputable fund providers in the world. VOO holds all 500 stocks that make up the S&P 500 index, in proportion to their market capitalization.
SSO is a leveraged ETF that charges an annual fee of 0.89%, and has over $2.3 billion in assets under management. It was launched in June 2006 by ProShares, a leading provider of alternative ETFs. SSO uses derivatives and debt to amplify the daily returns of the S&P 500 index by a factor of two. This means that if the index rises by 1% in a day, SSO will rise by 2%, and vice versa. However, this also means that SSO is more volatile and risky than VOO, as it can magnify losses as well as gains.
How do VOO and SSO compare in terms of performance?
Over the past four years, SSO has outperformed VOO with an annualized return of 26.1%, while VOO has yielded a comparatively lower 12.29% annualized return. This is because SSO has benefited from the strong bull market that has lifted the S&P 500 index to new highs, especially after the COVID-19 pandemic-induced crash in March 2020. However, this does not mean that SSO will always beat VOO in the long run, as leveraged ETFs tend to suffer from leverage decay and compounding effects over time.
Leverage decay occurs when the daily rebalancing of leveraged ETFs causes them to deviate from their target exposure over time, especially when the underlying index is volatile or trending sideways. For example, if the index rises by 10% one day and falls by 10% the next day, it will end up at the same level as before, but a 2x leveraged ETF will lose 1% due to rebalancing costs. Compounding effects occur when the cumulative returns of leveraged ETFs differ from the multiple of the cumulative returns of the underlying index over time, depending on the direction and magnitude of price movements. For example, if the index rises by 25% one year and falls by 20% the next year, it will end up with a positive return of 0%, but a 2x leveraged ETF will end up with a negative return of -8%.
Therefore, leveraged ETFs like SSO are more suitable for short-term trading or hedging purposes, rather than long-term investing. They require constant monitoring and adjustment to maintain their desired exposure and risk level. They also incur higher fees and taxes than non-leveraged ETFs like VOO.
What are the other factors to consider when choosing between VOO and SSO?
Besides performance, there are other factors that investors should consider when choosing between VOO and SSO, such as:
- Risk-adjusted metrics: These are indicators that measure how much return an investment generates per unit of risk taken. Some common risk-adjusted metrics are Sharpe ratio, Sortino ratio, Omega ratio, Calmar ratio, and Information ratio. According to PortfoliosLab1
, a tool that compares ETFs on various characteristics, VOO has a higher Sharpe ratio (1.27 vs 1.13), Sortino ratio (1.82 vs 1.62), Omega ratio (1.51 vs 1.43), Calmar ratio (1.82 vs 1.38), and Treynor ratio (16.69 vs 14.9) than SSO over the past four years. This means that VOO has delivered more return per unit of risk than SSO over this period.
- Dividend yield: This is the annualized percentage of income that an investment pays out to its shareholders from its earnings or cash flow. According to etf.com, VOO has a higher dividend yield than SSO for the trailing twelve months (1.51% vs 0.31%). This means that VOO provides more income to its investors than SSO, which can be reinvested or used for other purposes.
- Correlation: This is a measure of how closely two investments move together in the same direction. A correlation of 1 means that they move perfectly in sync, while a correlation of -1 means that they move perfectly in opposite directions. A correlation of 0 means that they have no relationship at all. According to PortfoliosLab, the correlation between VOO and SSO is 1, which is considered to be high. This means that they have a strong positive relationship, and tend to move together in the same direction. Having highly correlated investments in a portfolio may signal a lack of diversification, potentially leading to increased risk during market downturns.
