State Street Global Advisors is set to combine two sizable ETFs, both of which provide US small-cap equities exposure, into a colossal fund with more than $7 billion in assets.

SSGA will combine its two mainstream US small-cap equity ETFs into a single fund on 9 June.

Effective 9 June 2023, the $1.8bn SPDR S&P 600 Small Cap ETF (SLY US) will be absorbed by the $5.3bn SPDR Portfolio S&P 600 Small Cap ETF (SPSM US).

Both ETFs are currently linked to the S&P Small Cap 600 Index, S&P Dow Jones Indices’ flagship reference for the small-cap segment of the US stock market.

The S&P Small Cap 600 covers the 600 lowest capitalization stocks within the broad market S&P 1500 Composite which consists of 1,500 stocks and covers approximately 90% of the US’s total market capitalization.

Both SLY and SPSM are seasoned ETFs having debuted in November 2005 and July 2013, respectively, although their underlying indices have changed over time.

SLY only adopted the S&P Small Cap 600 in 2010, becoming part of SSGA’s headline US equity ETF suite which also includes the $360bn SPDR S&P 500 ETF (SPY US) and $20bn SPDR S&P Midcap 400 ETF (MDY US). With very tight bid/ask spreads, the trio of ETFs in the suite are designed to cater to institutional investors who may wish to enact sizable transactions without incurring large trading costs.

SPSM, meanwhile, came about in its current form in October 2017 when SSGA switched the fund’s underlying index and introduced it as part of the newly launched SPDR Portfolio ETFs, an ultra-low-cost ETF suite providing core portfolio building blocks. The suite’s ultra-cheap management fees are designed to attract long-term retail investors – SPSM was offered with an expense ratio of just 0.05% compared to SLY’s price tag at that time of 0.15%.

While the ETFs served different investor groups at the time, justifying both of their existence, the dynamic has changed over the years.

Firstly, SSGA lowered SLY’s expense ratio to 0.05% in January 2020, effectively putting it on an even level with SPSM in terms of management costs.

Secondly, SPSM has become notably popular, far eclipsing SLY in terms of assets under management and continuing to widen the gap with greater net inflows every year. This popularity has driven down the ETF’s trading costs, making the fund the superior choice for larger volume investors – SPSM’s 30-day median bid/ask spread of 0.02% is a fraction of SLY’s 0.14%.

Combining the two funds now makes more sense in that it facilitates the creation of a larger and potentially even more cost-effective ETF, a situation that will benefit for all types of investors.

Despite the combined fund’s notably size, it will need to compete with other behemoth US small-cap ETFs such as the $63bn iShares Core S&P Small-Cap ETF (IJR US), which comes with an expense ratio of 0.06%; the $40bn Vanguard Small-Cap ETF (VB US), which has an expense ratio of 0.05%; and the $14.7bn Schwab US Small-Cap ETF (SCHA US), which costs 0.04%.