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What Are S&P Depository Receipts (SPDRs)?

Finance

S&P Depository Receipts (SPDRs, also sometimes referred to as "spiders") are an Exchange Traded Fund (ETF) set up to mimic the movements of the Standard and Poor's 500 Composite Stock Price Index. SPDRs give small investors the option to invest in the broad market without trading in large numbers of stocks. SPDRs also allow investors with less knowledge of stocks to successfully compete in the investment arena.

Since the creation of S&P Depository Receipts in January 1993, the number of Exchange Traded Funds has grown to about 350 worldwide and nearly 200 in the United States. When you buy a share in the fund, you are purchasing a single unit of ownership in the SPDR trust.

SPDRs are traded like stock on the American Stock Exchange under the ticker symbol "SPY." The SPDR trust tracks the S&P 500 Index so that the value of each unit reflects any movement in the index. The price of a unit in the trust is always the current value of the S&P 500 divided by 10 (for example, if the S&P Index stands at $1,266.90, then the unit price of a SPDR is $126.69).

The SPDR trust is a unit investment trust that expires at the end of the century on December 31, 2099. State Street Bank and Trust of Boston holds the actual shares of stock. SPDR holders receive quarterly "dividend equivalent amounts" of cash for each SPDR unit they own, based on the dividends paid by the stocks in the S&P 500. These payments are made the last business day of the quarter. State Street Bank and Trust of Boston deducts a small management fee of 0.185 percent from this amount.

Unlike a mutual fund, the SPDR trust has different regulations governing it. The main differences are:

  • A trust does not have to distribute capital gains
  • Like stock, shares in a trust are set at the time it is sold
  • There are a fixed number of shares in a trust that investors buy and sell on the market
  • You can purchase shares in SPDRs at any time when the market is open (mutual funds, in contrast, can only be purchased at certain times in a session)

In addition to SPDRs based on the S&P 500, you can also purchase MidCap SPDRs that track the S&P 400 Index of mid-cap companies (companies with market capitalizations of $2 billion to $10 billion).

When it comes to investing in the stock market, those with more knowledge and more money usually have the advantage. Well-informed investors have a better chance of selecting stocks on the rise, and those with more money can buy a broader range of stocks.

However, SPDRs basically give small investors the same advantage. These investors gain the knowledge of the financial advisors who choose the companies for the S&P 500, and they gain the ability to invest in 500 different companies.

Although SPDRs are traded like stock, they are not subject to the dramatic fluctuations that individual stocks sometimes experience. The current level of the S&P 500 Index, not investor demand, determines their market value, making them a stabler investment over stocks.

The main drawback to SPDRs is that State Street Bank and Trust of Boston charges a commission every time you put money into the trust. If you are an investor who likes to invest small amounts when building up your investment portfolio, you might look into Dividend Reinvestment Plans (DRPs) that come with Optional Cash Purchase Plans.

You should determine how often you want to add money and how much the commissions would add to your expenses. On the whole, if you have an amount of money that you want to invest in the stock market, SPDRs offer you a way of benefiting from broad movements in the market. This is particularly true when you want to take advantage of periods when the market is rising overall, but lack the knowledge about individual stock prices.