04) Exchange-Traded Funds: SPDR S&P 500 ETF

The first Exchange-Traded Funds in the US is the SPDR S&P 500 ETF with a trade name of SPY on the American Stock Exchange (AMEX:SPY). It was created by State Street Global Advisors (SsgA), and is also among the biggest ETF managers in the whole world. The SPY is the most popular ETF which tracks, as the name implies, the S&P 500 index. It is among the most actively traded stocks; at any given day, trading for this ETF can easily reach between 100 to 400 million shares.

The SPY ETF’s main objective is to closely replicate the total return of the S&P 500, before expenses, where possible.

The S&P 500 Index

The S&P 500 is a large cap index representing around 75% of the total dollar value of all outstanding shares of the total equity market in the US. It is one of the most commonly used benchmarks for all of the US stock market. S&P, short for Standard and Poor’s, is an index composed of the top 500 companies in the US. There are 10 main industrial sectors included in the index as determined by the Global Industrial Classification Standard (GICS).

Performance of SPY ETF

One of the advantage of the SPY ETF is its low cost or expense ratio. An investor can purchase the SPY and make it a good portion of his portfolio. He can also combine it with other ETFs (sector ETF, value-based ETF, small cap ETF). All this is done as a strategy to maximize exposure to the stock market. ETFs can also be traded actively since selling and/or buying it in the market is easy.

Let’s set an illustration of how the SPY ETF expense ratio is low in proportion to the investment. With a closing price of $139.27 on May 21, 2008, for example, 500 shares would cost the investor $69,635 ($139.27 x 500) excluding fees and commissions. The expense ratio at that time is 0.0945% or a cost of only around $65 per year. This is why it is very popular among investors.