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Updated on January 23, 2023
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Michael J Boyle
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Reviewed byMichael J Boyle
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Definition
The SPDR S&P 500 ETF (SPY) is an exchange-traded fund (ETF) that tracks the Standard & Poor's 500 (S&P 500) index. It does this by holding a portfolio of stocks in companies that are included in the S&P 500.
Key Takeaways
- The SPDR S&P 500 ETF (SPY) is an exchange-traded fund (ETF) that tracks the Standard & Poor's 500 (S&P 500) index.
- The SPDR S&P 500 exchange-traded fund (ETF) is designed to produce returns roughly in line with the S&P 500 Index before expenses.
- The managers of the fund purchase and sell stocks to align their holdings with the S&P 500 index.
- You can find many alternatives to the SPDR S&P 500 ETF, including the Vanguard S&P 500 ETF and the IShares Core S&P 500 ETF.
Definition and Example of the SPDR S&P 500 ETF (SPY)
The SPDR S&P 500 is an exchange-traded fund (ETF) that was created to provide an investment vehicle that produces returns roughly in line with the S&P 500 Index before expenses. The fund, known as "SPY" for its trading symbol on the NYSE Arca exchange, was the first ETF listed in the U.S. in January 1993 when introduced by State Street Global Advisors. "SPDR" stands for "Standard & Poor's Depositary Receipts."
An ETF is a fund that owns securities like stocks, bonds, and mutual funds. Investors buy shares in the fund, but they don't own the underlying assets. ETF shares are traded on a stock exchange.
SPY is a popular ETF and is consistently one of the highest-volume trading vehicles on U.S. exchanges. Its average volume is typically over 70 million shares, although that does fluctuate over time. Many investors and hedge funds use SPY because it represents the —a basket of 500 major U.S. companies.
The S&P 500 index is composed of U.S. companies across all Global Industry Classification Standard (GICS) sectors with an unadjusted market capitalization of $8billion or greater. Each company in the index must also have had positive earnings in the most recent quarter and over the most recent four quarters.
Note
Investors use the SPDR S&P 500 ETF (SPY) because it provides exposure to a wide range of large U.S. companies with a single purchase.
How the SPDR S&P 500 ETF (SPY) Works
The SPDR S&P 500 is a unit investment trust, which means that SPY must attempt to fully replicate the S&P 500. The managers of the fund purchase and sell stocks to align their holdings with the S&P 500 index. When you buy a share of SPY, you're buying a unit of the current holdings representing a small portion of each stock in the S&P 500 index.
Investors buy SPY hoping that the holdings within the fund—the stocks of the S&P 500 index—will rise. This allows them to sell their SPY units at a higher price than what they paid. If the holdings within the fund fall, the value of each unit/share of SPY will fall as well.
SPY trades on the stock exchange, so traders canbuy or sell their units to or from other market participants. Occasionally, the unit's price might not reflect the underlying value of the holdings within a unit, because the units are traded on an exchange. Euphoria or fear can cause buyers or sellers to push the price above or below the true value of the underlying holdings.
Traders can view the true value of one SPY unit by looking up the symbol "SPY.NV." It's updated each morning with the value of holdings. NV indicates net asset value.
Alternatives to SPDR S&P 500 ETF (SPY)
While SPY is the biggest ETF tracking the S&P 500, it's far from the only one. One popular alternative is the Vanguard S&P 500 ETF (VOO), which also tracks the index and offers a lower expense ratio (0.03%) than SPY (0.095%) as of January 2023.The expense ratio is the percentage of a fund's assets that are used for administrative expenses. It's essentially a fee you pay for buying a professionally managed product. Another competitor, iShares Core S&P 500 ETF (IVV), also offers an expense ratio of 0.03%.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
ETF.com. "SPY SPDR S&P 500 ETF Trust."
State Street Global Advisors. "SPDR S&P 500® ETF Trust."
S&P Dow Jones Indices. "S&P 500," Page 1.
U.S. Securities and Exchange Commission. "SPDR® Exchange Traded Funds: Basics of Product Structure."
State Street Global Advisors. "SPDR® S&P 500® ETF Trust: Prospectus Dated January 28, 2022," Pages 4-6, 62-63.
Vanguard. "VOO Vanguard S&P 500 ETF."
Yahoo Finance. "SPDR S&P 500 ETF Trust (SPY)."
iShares by Blackrock. "iShares Core S&P 500 ETF."
I'm Cory Mitchell, a Chartered Market Technician and a seasoned day trading expert with a rich background spanning over a decade. My expertise has been acknowledged through my extensive contributions to reputable publications such as Investopedia and Forbes. I have a solid track record of providing valuable insights into investing, trading, and day trading. To further establish my credibility, my work has been reviewed by financial professionals like Michael J Boyle, who boasts over 10 years of experience in financial planning, derivatives, equities, fixed income, project management, and analytics.
Now, diving into the concepts presented in the article "Investing Stocks by Cory Mitchell":
1. SPDR S&P 500 ETF (SPY):
- Definition: The SPDR S&P 500 ETF (SPY) is an exchange-traded fund designed to mirror the performance of the Standard & Poor's 500 (S&P 500) index. It achieves this by holding a portfolio of stocks from companies included in the S&P 500.
- Key Takeaways:
- SPY aims to produce returns in line with the S&P 500 before expenses.
- Fund managers buy and sell stocks to align with the S&P 500 index.
- SPY is widely traded, with alternatives like Vanguard S&P 500 ETF and iShares Core S&P 500 ETF.
2. SPY's Creation and Structure:
- SPY was introduced in January 1993 by State Street Global Advisors, making it the first ETF listed in the U.S.
- "SPDR" stands for "Standard & Poor's Depositary Receipts."
- An ETF is a fund that owns securities like stocks, bonds, and mutual funds. Investors buy shares but don't own the underlying assets. SPY shares are traded on a stock exchange.
3. How SPY Works:
- SPY is a unit investment trust, aiming to fully replicate the S&P 500.
- Fund managers buy and sell stocks to align holdings with the S&P 500 index.
- Investors buy SPY shares, anticipating the rise in the value of S&P 500 stocks. The unit's value may fall if S&P 500 stocks decline.
- SPY is traded on the stock exchange, allowing buying and selling between market participants.
4. True Value of SPY:
- Traders can check the true value of one SPY unit by looking up the symbol "SPY.NV," indicating net asset value. It's updated daily with the value of holdings.
5. Alternatives to SPY:
- Popular alternatives include Vanguard S&P 500 ETF (VOO) and iShares Core S&P 500 ETF (IVV).
- VOO offers a lower expense ratio (0.03%) compared to SPY (0.095%) as of January 2023.
Understanding these concepts is crucial for investors seeking exposure to the S&P 500 through ETFs. The article emphasizes SPY's popularity and introduces alternatives, providing valuable information for making informed investment decisions.
