All market-linked investments carry a certain level of risk. Fortunately, you can lower this risk by investing in a diversified portfolio of stocks. One of the easiest ways to do that is to invest in an exchange-traded fund (ETF) that tracks the performance of a market index.
If you, like many other investors, prefer to invest in the American stock market, the SPDR ETF is one of the best investment options to gain exposure to a diversified portfolio of stocks. Wondering what an SPDR ETF is? Continue reading to find out all about them. But before that, let’s quickly look at what exchange-traded funds are.
What Are Exchange-Traded Funds?
Exchange-traded funds or ETFs are funds that invest in a basket of different stocks and other securities. However, unlike regular funds, ETFs are listed on a stock exchange like stocks, allowing you to easily purchase and sell units of these funds.
There are many exchange-traded funds that aim to replicate the performance of a specific market index by investing in the same set of stocks as contained in the index. Since the goal of such funds is to match the performance of an index and not outperform it, they don’t require active fund management, which often translates to lower expense ratios.
What Are Spider (SPDR) ETFs?
Standard & Poor’s Depositary Receipt (SPDR) ETF is an exchange-traded fund that aims to replicate the performance of the broad-market S&P 500 index. Colloquially referred to as Spider ETFs by U.S. investors, these funds were first introduced to the American Stock Exchange (now the New York Stock Exchange) in 1993 by an investment management group by the name of State Street Global Advisors.
Currently, there are plenty of other similar funds that track the S&P 500 index in addition to the SPDR ETF by State Street Global Advisors. Some funds track the S&P 500 index as a whole, whereas others track certain specific sectors.
Also Read More About How to Invest in S&P 500
Understanding SPDR ETF Meaning and the Operations
Investing in a SPDR ETF can give you exposure to as many as 500 large-cap and mid-cap stocks of the S&P 500 index. This makes it a good investment option for investors looking to create long-term wealth by investing in a diversified portfolio of stocks.
Each unit of the exchange-traded fund represents 1/10th of the S&P 500 index and is also priced at 1/10th of the index’s dollar value. Here’s an example to help you understand how the ETF is priced in the market.
Assume that the S&P 500 index’s current dollar market value is $4,560. Each unit of the SPDR S&P 500 ETF must be priced at 1/10th of the index’s dollar value, which means that it should be trading at $456 ($4,560 ÷ 10) per unit.
Since the SPDR ETF is listed and traded on an exchange, you’re free to purchase and sell its units at any time during market hours without any restrictions. Additionally, as an investor in the fund, you’re also eligible to receive dividends, which you can either receive in cash or reinvest into the fund.
One of the many advantages of SPDR S&P 500 ETFs is that they often feature low expense ratios due to the passively managed nature of the funds. This makes them good investments for investors looking for cost-effective options that offer exposure to a diversified portfolio of stocks.
Components of SPDR
The components of a typical SPDR ETF include all the stocks that feature in the S&P 500 broad-market index, which is a collection of about 500 stocks across 24 different sectors from the large-cap and mid-cap segments.
The list of SPDR stocks includes tech stocks like Apple, Amazon, Microsoft, Alphabet, Meta and NVIDIA and other market heavyweights like Tesla, Berkshire Hathaway, UnitedHealth Group, Walmart and Pfizer, among others.
Examples of SPDR ETFs
There are a plethora of other SPDR funds in addition to the SPDR S&P 500 ETF. These funds generally track a section or a sector of the S&P 500 index. The SPDR S&P Regional Banking ETF, for example, tracks the performance of the S&P Regional Banks Select Industry index, which consists of about 102 banking stocks that feature in the S&P 500 index.
Another example of an SPDR ETF is the SPDR S&P Dividend ETF. This particular exchange-traded fund tracks the performance of the S&P High Yield Dividend Aristocrats index, which is a collection of 109 dividend-paying stocks that feature in the S&P 500 index.
Why Invest or Trade in SPDR?
SPDR ETFs are widely considered to be one of the best funds to trade and invest in. Here’s a quick overview of some of the reasons why you should invest or trade in them.
- Lower Risk – SPDR ETFs, even those that track only a particular sector or section of the S&P 500 index, invest in a wide range of stocks across market capitalisations. Such diversity lowers the overall portfolio risk and may make it more resilient to adverse market movements.
- Stability – Since SPDR ETFs invest primarily in large-cap and mid-cap companies, they’re less prone to market volatility. Also, the diverse asset portfolio of the funds adds to the stability of the price movements.
- Liquidity – The stocks that feature in the S&P 500 index are some of the most popular and sought-after companies. Such high levels of demand make SPDR ETFs one of the most liquid funds, whose units can be bought and sold on the exchanges easily.
- Dividend Payments – Since most of the SPDR stocks are well-established, mature and fundamentally strong companies, they often disburse dividends at regular intervals. These dividend payments can serve as a passive income source or can be reinvested back into the ETF to increase your overall gains.
Conclusion
Investing in SPDR ETFs is one of the best ways to gain exposure to a diversified portfolio of U.S. stocks. You also get other advantages like a lower expense ratio, lower risk and the ability to purchase and sell units of the fund instantly through a stock exchange. In addition to being a good investment option for long-term wealth creation, you can also trade in these funds for short-term gains.
FAQs
How do SPDR ETFs work?
SPDR ETFs are exchange-traded mutual funds that invest in a basket of securities to replicate the performance of an index. Investors can purchase and sell the units of these funds through stock exchanges. Investing in these ETFs is a low-cost way to gain exposure to a portfolio of diversified stocks.
Are SPDR ETFs passively or actively managed?
Since the primary objective of SPDR ETFs is only to replicate the performance of a specific index and not outperform it, they’re generally passively managed.
What is the expense ratio of SPDR ETFs?
The expense ratio of SPDR ETFs varies depending on the type of fund you intend to invest in. However, it often tends to be very low compared to other actively managed mutual funds, making them a cost-effective investment option for investors looking for long-term wealth creation.
Do Spider ETFs pay dividends?
Yes. Many SPDR ETFs pay dividends from time to time. However, the frequency and the amount of dividends may vary depending on the type of stocks that the exchange-traded fund invests in. Investors can either choose to receive these dividends as cash or reinvest them back into the fund.
Can I use SPDR ETFs for long-term investing?
Yes. SPDR ETFs are good long-term investment options due to their diversified portfolios, which can reduce the overall market risk. Meanwhile, the low expense ratios make them cost-effective investments for investors with a buy-and-hold approach.
