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Answer:
Dear
Mr. Dowling,
Good
question. I think you'll like the answer since you're
interested in "index" investing. But before we begin
our discussion, other good news -- because you have
asked the 130th question in this column, we are going
to send you a copy of one of my books.
About
Spiders
The
word is a handy abbreviation for Standard & Poor's
Depositary Receipts, also known as SPDRs. They've
been around since 1993.
Spiders,
which trade like a stock on the American Stock Exchange
-- the symbol is SPY -- represent ownership in the
SPDR Trust, a long-term unit investment trust. This
Trust holds a portfolio of common stocks that track
the price performance and dividend yield of the S&P
500 Stock Index.
The
underlying value of a share, however, is not equivalent
to 100% of the value of the S&P 500. It approximates
1/10 of the value of the Index.
Spiders
pay a quarterly cash dividend, based on the accumulated
dividends paid out by the stocks in the Trust, minus
Trust expenses.
The
expense ratio for the Trust is only 0.12%. So, the
annual cost of a $10,000 investment in SPDRs would
be $12.00. The dividend is paid on the last business
day in April, July, October and January.
Perhaps
the easiest way to understand Spiders is to view them
as a stock alternative to a Standard & Poor Index
mutual fund. They give you the diversity of the S&P
500 with the trading flexibility of a stock.
Better
Than a Fund?
Yes,
in some ways they are.
(1)
Liquid. Spiders are actually more liquid than
a mutual fund in that you can buy or sell them, just
as you can all stocks, any time during the trading
day and in any amount you wish.
(2)
Marginable. You can also margin Spiders, if you
have a margin account. A long position requires 50%
margin while a short position requires 150% margin.
(3)
Shortable. You can also sell Spiders short. (Selling
short involves selling borrowed shares in the expectation
that the price will fall.) And, unlike common stocks,
SPDR shares are exempt from the rule that requires
shares be sold only on an uptick (a sale price higher
than the preceding last sale). Spiders can be sold
short on a downtick.
(4)
Tax Advantaged. Spiders also have a distinct tax
advantage over a mutual fund. You are the one to determine
when to sell your shares and thus (if sold at a profit)
when to trigger a capital gains tax. With a mutual
fund, capital gains are automatically distributed
once a year, typically in December. You have no say
over the timing or the amount of the fund distribution.
OTHER
ADVANTAGES
(5)
Diversification. By owning just one stock, you
instantly have a widely diversified portfolio.
(6)
Income. You earn quarterly cash dividends, which
can be reinvested in additional shares.
(7)
No load. There's no sales load involved. (You
will, however, have to pay a brokerage commission.
Click
here to learn about fees at BUYandHOLD.)
(8)
Retirement accounts. You are allowed to put Spiders
in your 401(k) or other retirement plan as well as
in your regular or Roth IRA.
Current
Price
As
we go to press, SPIDERs are trading at $87.70. The
52 week high / low is: $114.95 / $77.07.
Second
Generation Spiders
In
addition to the original SPDR, there are now nine
industry sector SPDR Funds. Collectively, all nine
represent the companies in the S&P 500 Index. Their
names and symbols are:
-
The Basic Industries Fund (XLB)
- The
Consumer Services Select Fund (XLV)
- The
Consumer Staples Select Fund (XLP)
- The
Cyclical/Transportation Fund (XLX)
- The
Energy Fund (XLE)
- The
Financial Fund (XLF)
- The
Industrial Fund (XLI)
- The
Technology Fund (XLK)
- The
Utilities Fund (XLU)
For
More Information:
You
asked where you can find a list of spiders. In the
financial pages of most newspapers they are under
the heading: American Stock Exchange Listed Stocks.
You
should also go to: www.amex.com.
On the home page click on: "In the Limelight: 10th
SPDR Anniversary" and you'll find a great deal of
background information as well as performance records.
Bottom
Line
If
you decide to invest in Spiders, keep in mind that
there are risks involved. If the S&P 500 drops, the
value of your Spiders will also drop. On the other
hand, if the market goes up, so will your shares of
SPY.
BUYandHOLD
does not recommend any securities. The securities
mentioned above are being used for informational purposes
only and should not be regarded as an offer to sell
or as a solicitation of an offer to buy.
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