| Answer:
Dear
Mr. Dowling,
Good
question to ask as we approach Halloween.
About
SPIDERS...
SPIDERS
or SPDRs crawled out of the financial web on January
29, 1993, when they became available on the American
Stock Exchange.
SPIDERS
stands for "Standard & Poor's Index Depository Receipts."
It is known as an "Exchange Traded Security" and trades
under the symbol SPY. A SPIDER is actually a trust
that owns the stocks that make up the S&P 500 Index
and therefore it tracks or mirrors the performance
of the Index.
Although
SPY is similar to an index mutual fund, I feel it
has some distinct advantages over funds which I explain
below. (Index mutual funds track specific market indices
and are offered by companies such as Fidelity, T.
Rowe Price and Vanguard.)
What
SPIDERS are like...
1)
Liquidity. SPY can be bought and sold at any time
during the trading day. The trade takes place at the
market price at that time. At the close on October
10th, the price was $80.63/share. You can also place
stop or limit orders so you can control how much you're
willing to pay or at what price you're willing to
sell the security.
$TIP:
I feel these are two key advantages that SPY has over
an index mutual fund. Funds cannot be traded throughout
the day. They can be bought or sold only at the daily
closing price. Nor can you place stop or limit orders
with funds.
2)
Dividends. SPY pays out dividends quarterly, based
on the dividends declared by the stocks held in the
trust. Typically, these dividends cannot be automatically
reinvested (however, they can be at BUYandHOLD if
you set up the automatic dividend reinvestment option
for this security) -- a slight disadvantage in that
with most index mutual funds you can reinvest your
dividends in additional shares, typically for free.
3) Commissions. SPY trades as a security and
so must be purchased through a stockbroker which involves
a commission. Here at BUYandHOLD the Basic Investing
Plan ($6.99 per month) includes your first two window
trades. All additional window trades during that monthly
billing cycle are only $2.99 each. Our Unlimited Investing
Plan ($14.99 per month) allows you to buy, sell or
E-ZVestsm as much as you want within our three
daily trading windows.
4)
Minimum investment. You can purchase any number
of shares of SPY that you wish. And, as you probably
know, at BUYandHOLD your purchase can be any dollar
amount you wish, as long as you meet our minimum requirement
of $20. Most index mutual funds, on the other hand,
require substantial minimum investments ranging from
$1,000 or $2,500 to $5,000 or more.
5)
Selling short. SPY shares can be sold short and
without having to conform to the up-tick rule -- that
means you don't have to wait for an up-tick in price
to sell shares short. (Selling short is selling in
anticipation of buying back the stock at a lower price
and profiting from the decline.) Mutual funds cannot
be sold short.
$TIP:
To read a previous column on the subject of up-ticks,
click
HERE. For one on selling short, click
HERE.
6)
Diversity. When you purchase shares of SPY, you
are investing in 500 leading companies. In other words,
this security enables you to buy the S&P Index as
if it were a single share of stock. It would cost
a fortune to put together a portfolio of 500 individual
stocks.
Each
SPIDER is valued at 1/10th of the underlying S&P 500.
For example, if the S&P 500 is trading at 1400, SPIDERS
trade around 140. Or to look at it another way, if
there's a 10 point move in the S&P up or down, SPIDERS
will move 1 point up or down.
7)
Management fee. The management expenses are deducted
from the quarterly cash distribution and are capped
at 1/10th of 1%.
8)
Taxes. You will have to pay tax if you have a
capital gain when you sell your position.
The
Top Ten...
The
top ten SPIDER holdings currently are:
Microsoft
General Electric
Exxon-Mobil
WalMart
Pfizer
Citigroup
American International Group
Johnson & Johnson
CocaCola
IBM
For
More Information
You
asked where you could get additional details. I suggest
you log on to the American Stock Exchange site (www.amex.com)
where you'll find a wealth of information on SPY as
well as on other Exchange Traded Funds. In addition
to clicking on ETFs on the home page, type in SPY
in the quote box and you'll get historic data, charts
and other statistics. You can also order a copy of
the prospectus online.
BUYandHOLD does not offer or provide
any investment advice or opinion regarding the nature,
potential, value, suitability or profitability of
any particular security, portfolio of securities,
transaction or investment strategy. Any investment
decisions you make will be based solely on your evaluation
of your financial circumstances, investment objectives,
risk tolerance, and liquidity needs. The securities
mentioned above are being used for illustrative and
informational purposes only and should not be regarded
as an offer to sell or as a solicitation of an offer
to buy and past performance is no guarantee of future
results.
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