What Are SPDR Index Funds, and How Can They Boost Your Portfolio?
Arachnophobics, worry not — SPDRs aren’t at all what they sound like, and they’re certainly not as scary. If you’re in the process of learning more about investing, you might have come across something called SPDR index funds. These financial products have become staples of the American Stock Exchange since they were first introduced in 1993, and they’re popular among investors of all backgrounds.
To help you learn more about SPDRs, we’re taking a look at what they are, how they work and how to determine if they’re right for your portfolio — along with a breakdown of these classic investment options to help you get a well-rounded idea of SPDR strategies.
What Are SPDRs?
Rest assured that SPDRs, often simply called “spiders,” have nothing to do with eight-legged bugs. SPDRs is an acronym for “Standard & Poor’s Depositary Receipts,” a collection of exchange-traded funds (ETFs) run by State Street Global Advisors. The asset-management team behind SPDR ETFs is an arm of State Street Corporation, the creators of the world’s first ETF and one of the best-known names in the financial industry.
While there are different types of SPDR funds, sometimes the name is also used to refer to SPY, one of the top SPDR funds and the oldest ETF in the United States. SPY is still one of the most popular ETFs on the market because it’s set up to mimic the price movement of Standard and Poor’s 500 Composite Stock Price Index.
SPY trades resemble stock trades when it comes to buying and selling, but instead of buying a share of ownership in a single company, you’re buying a unit of ownership in this particular SPDR trust. The trust itself owns a portfolio composed of each of the stocks in the S&P 500, an index of the 500 largest publicly traded companies in the United States. The S&P 500 index is often used to gauge the health of large-cap U.S. stocks overall.
How Do SPDRs Work?
SPDR offers several other ETFs to choose from, each of which allows you to buy into a sort of group portfolio that’s composed of stocks that center on a specific theme. Just like SPY tracks the S&P 500, other SPDR ETFs are made up of stocks that track particular sectors.
For instance, the SPDR XLV is made of some of the top stocks in the healthcare industry, while XLK is composed entirely of equities in the technology sector. Each ETF tracks the overall average movement of all of the stocks in its portfolio. In other words, if the healthcare sector does well, the price of XLV will generally increase to reflect this trend. On the other hand, if the technology sector has a terrible year, that too will be reflected in the price of XLK.
The idea here is that, rather than buying each stock in an individual sector, you can buy one share of an ETF that reflects the average price of all those stocks at once.
SPDR Performance and Benefits
When deciding on which SPDR fund to invest in, be sure to look at that particular ETF’s performance history to see how well it’s done in the past. SPY tends to be a popular choice simply because it more or less tracks the stock market’s performance overall. Thus, depending on whether the market is up or down, its movements will be reflected in the price value of each share of SPY.
Just like any other type of investment, some ETFs will boast higher returns than others depending on which sectors they reflect. Between August 2020 and August 2021, for instance, SPY reflected a return of 31.96%.
During the same year, XRT, SPDR’s S&P Retail ETF, increased in value over 81%. Nonetheless, the diversity offered by ETFs makes it easier to invest by scaling your choices down to specific sectors to choose from. That way, you can avoid the added work of having to decide which individual stocks from each sector you’ll buy.
The Pros and Cons of SPDR Funds
As with any other investment, SPDR funds come with their own set of pros and cons. Let’s break them down so you can get a better idea of whether they’re right for you.
Track Record: When it comes to S&P 500 funds, SPDR’s track record is hard to beat. SPDR was the first to offer its own version of the S&P 500 ETF, and since its start, it’s always remained a gold standard.
Diversity: One of the top draws of ETFs across the board is that they’re a great way to invest in more stocks for a lower price. For example, suppose you think the healthcare sector, or any other sector for that matter, is a significant investment. In that case, it can be far more affordable to invest in a healthcare ETF than to purchase one of every individual stock in the sector.
Lower Volatility: Say that you decide instead to invest in three stocks in the healthcare sector. If one of them does well while the other two tank, you’re probably going to lose money. By offering lesser shares of more stocks, the assets in an ETF portfolio have a way of balancing each other out. For instance, if those same two stocks have a bad day, it doesn’t necessarily matter so much because there are 60+ other stocks in the ETF portfolio to pick up the slack.
Accessibility: ETFs are straightforward to trade and can be bought and sold in a way similar to regular stocks. You can also use the same set of trading tools, such as stop-losses, short sales, and market or limit orders. To invest, all you need is a brokerage account, which you can open online through several brokers, including TDAmeritrade, Interactive Brokers, E-Trade and J.P. Morgan.
Fewer Global Choices: While SDPR does offer a wealth of choices for the American market, it has fewer funds that focus on international or global assets. This may not be a problem, but it’s something to be aware of if international trading has captured your interest.
Pricing: Before you buy any ETF, make sure you look at the gross expense ratio, which is the yearly price of investing. Usually, it’s a relatively low percentage of your assets and varies depending on the fund. While most SPDR funds can be pricey, SPY has a fairly large expense ratio of 0.095%. It’s not as affordable as those of competing funds that have expense ratios as low as .03%.
Overall, SPDRs offer a fantastic array of ETFs to choose from, all of which are definitely worth taking a look at. Whether or not they prove beneficial to your portfolio will largely depend on your investment goals, the type of assets you’re interested in, and their fees in comparison to those of rival ETF providers.