A Standard & Poor's Depositary Receipt, or SPDR, is a type of exchange traded fund that began trading on the American Stock Exchange (AMEX) in 1993 when State Street Global Advisors' investment management group first issued shares of the SPDR 500 Trust (SPY). Sometimes called "spiders," SPY is an ETF based on the S&P 500 Index, and each share represents an ownership interest in the 500 stocks in the S&P 500. Today, there are a number of other SPDR funds available to investors; while some track stocks based on market value, others are focused on specific market sectors.
SPY vs. Mutual Funds
SPDR funds differ from mutual funds because shares of SPDR funds are not created for investors at the time of their investment. Instead, SPDRs have a fixed number of shares that are bought and sold on the open market and these shares trade on the exchanges like stock. Mutual fund shares, on the other hand, are created and redeemed by a mutual fund company.
- SPDR exchange traded funds are issued by State Street Global Advisors and are designed to track indexes or benchmarks.
- SPDR 500 Trust, sometimes called spiders, holds the same stocks as the S&P 500 Index.
- ETFs differ from mutual funds in that shares are traded on the exchanges like shares of stock.
- SPDR ETFs that focus on a specific market capitalization—small, mid, and large—also exist and some have been created to track specific market sectors like technology, utilities, or financials.
- Selling SPDRs short or buying put options can add an element of hedging to a portfolio.
The value of each unit in any SPDR exchange traded fund at any given time reflects the movement of the underlying index. Trading under the symbol SPY, the SPDR 500 Trust, for example, is designed to trade at approximately one-tenth of the level of the S&P 500. If the S&P 500 is at 1,800, the ETF shares will trade at roughly $180, but the relationship is not precise.
S&P Sectors and Capitalization
SPDR ETFs have been created to specialize on market capitalization and industry sectors within the S&P 500. In terms of market value, examples include SPDR Portfolio S&P 400 Mid-Cap ETF and SPDR Portfolio S&P 600 Small Cap ETF. On Jan. 24th, 2020, State Street Global Advisors announced index and name changes to some of these ETFs:
State Street has also created SPDRs based on different sectors of the S&P 500, such as SPDR Financials (XLF), SPDR Energy (XLE), and SPDR Basic Materials (XLB). Collectively, the sector funds hold the 500 stocks of the S&P 500.
SPDR Options, Futures, and Hedging
Since SPDR ETFs trade like stocks, shares can also be sold short. Many ETFs also have options tied to their respective performance, which can be used to hedge. When an investor has a long position in the S&P 500 SPDR ETF or to the stock market in general, for example, that investor will make money if the S&P 500 Index goes up. If the index goes down, the investor will begin to lose money on their investments. However, if that same investor hedges their bets by also shorting the SPDR or buying put options, then some risks can be mitigated, which is a practice known as hedging the market.
The Bottom Line
SPDR ETFs offer opportunities for individual investors. Shares can be bought to match the performance of a market or index. SPDRs also have the flexibility to give a depth of market exposure through one of the ETFs that tracks a broader index. Or an investor can make a concentrated bet by investing in one of the SPDRs that specializes in a sector or specific market capitalization. SPDRs also have the flexibility to be used as hedging instruments.