SPY as a Unit Investment Trust cannot reinvest dividends immediately like VOO forcing it to hold cash in a non-interest-bearing account until quarterly distribution. This cash drag reduces SPY’s effective yield to 1.00% versus roughly 1.10% for VOO costing investors approximately 0.10-0.15% in annual returns. The drag is most noticeable in bull markets where reinvested cash would otherwise compound. This structural limitation is a key reason long-term buy-and-hold investors often prefer open-ended alternatives despite SPY’s superior liquidity.

SPY has a legal termination date of January 22 2118 or 20 years after the death of the last survivor of eleven specific individuals named in the 1993 trust documents. This ancient UIT structure creates unique quirks including the cash drag prohibition on securities lending. While distant the clause reminds investors that SPY is not a perpetual modern ETF. This relic affects operational flexibility and contributes to its slightly lower yield compared to newer structures.

SPY is prohibited from lending securities to short sellers due to its UIT structure missing out on revenue that competitors like VOO use to offset costs or boost yields. This results in SPY’s higher 0.09% expense ratio and lower net yield. The rule reduces counterparty risk but comes at the expense of investor returns. For high-volume traders SPY’s unmatched liquidity still outweighs this drag but long-term holders lose meaningful compounding.

SPY dividends are generally qualified and taxed at favorable long-term capital gains rates provided investors meet the required holding period for the shares. The fund’s quarterly schedule means investors must carefully time purchases around ex-dates to capture distributions. While the yield is modest at 1.00% consistent growth at 5.82% annualized over five years supports rising income over time. Taxable account investors benefit from qualified status while retirement accounts eliminate immediate tax drag.