Exchange-traded funds based on the Standard & Poor's 500 Index of common stocks are known as "Spiders" because of their formal name -- Standard & Poor's depository receipts, or SPDRs. They trade on the American Stock Exchange under the symbol "SPY." SPDRs can be bought and sold through a brokerage firm like any stock issue.
Standard & Poor's 500
The Standard & Poor's 500 is an index of the common stocks of the 500 public companies considered to be the most widely held in the stock market. S&P constantly monitors the companies in the index to assure they meet specific criteria, such as being U.S. domiciled with total market value of all outstanding shares of at least $400 billion, and at least 50 percent of outstanding stock trading on the U.S. public markets.
An exchange-traded fund, called an ETF, is a clone of a specified index or industry grouping of common stocks, and trades like a stock. It is similar to a mutual fund in that it is backed by a portfolio of stocks regularly adjusted to exactly reflect the percentages each stock represents as part of that index. SPDRs represent a clone of the S&P 500, but there are also SPDRs that clone sectors of the S&P 500, such as shares of gold mining stocks. As the stocks in the ETF pay dividends, those dividends are passed through to the holders of the ETF, less administrative expenses. SPDRs, therefore, pay dividends.
SPDRs are a well-diversified investment vehicle for an investor who wants a simple way to invest in the common stock of top U.S. companies and receive dividend income. Options on SPDRs are traded on the Chicago Board Options Exchange. Trading began in January 2005 and provides holders of SPDR ETFs a way to hedge their positions. Because the SPY options efficiently track overall market movements, they also are used by traders who focus on trading the indexes. The options are often referred to as "Spiders" as well.
Companies listed on all U.S. exchanges are eligible for inclusion in the S&P 500 index. S&P states that because this index "includes a significant portion of the total value of the market, it also represents the market." This makes investment or trading in SPDRs ETFs and options an efficient way to trade the broad market. It also makes SPDRs a reliable indicator of market direction.
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