SPY ETF: Understanding the SPDR S&P 500 - Performance & Investment

The Standard and Poor Depositary Receipts (SPDR) S&P 500 ETF is an exchange-traded fund that tracks the S&P 500 stock market index. The SPDR S&P 500 ETF is listed on the New York Stock ExchangeNew York Stock Exchange (NYSE)The New York Stock Exchange (NYSE) is the largest securities exchange in the world, hosting 82% of the S&P 500, as well as 70 of the biggest and trades under the ticker symbol SPY. The SPY’s price tracks the S&P 500 index.

The S&P 500 stock market index, which is made up of the 500 largest companies listed on U.S. stock exchanges, is considered the best indicator of the overall health of the U.S. economy and, to a larger extent, the world economy.

Therefore, SPDR S&P 500 ETF allows investors to track the performance of the U.S. economy without having to buy all the stocks listed on the S&P 500 directly. The SPY comes with an 0.09% expense ratioExpense RatioAn expense ratio is a fee charged by an investment company to manage the shareholders' funds. Investment companies such as mutual funds often incur various operating expenses when managing investors’ funds, and they charge a small percentage on the funds under management to cover the expenses., which is the ETF equivalent of fund management fees. An investor who invests $100,000 into the SPY ETF must pay $90 as management fees.

Summary

• The Standard and Poor Depositary Receipts (SPDR) S&P 500 ETF is an exchange-traded fund that tracks the S&P 500 stock market index. The SPDR S&P 500 ETF is listed on the New York Stock Exchange and trades under the ticker symbol SPY.
• The SPY’s price tracks the S&P 500 index.
• The SPDR S&P 500 ETF allows investors to track the performance of the US economy without having to buy all the stocks listed on the S&P 500 directly. 

What is an ETF?

An exchange-traded fund (ETF) is an investment fund that comprises stocks and index fundsIndex FundsIndex funds are mutual funds or exchange-traded funds (ETFs) that are designed to track the performance of a market index. Currently available index funds track different market indices, including the S&P 500, Russell 2000, and FTSE 100.. ETFs are traded on stock exchanges (like stocks) and track the performance of some underlying asset or collection of assets (like index funds). They allow investors to diversify risks and invest in a broad basket of securities without directly purchasing all of the securities.

ETFs also allow investors to take positions in certain specific industries. For example, an investor who is bullish on electric vehicles may invest in an electric vehicles-themed ETF that tracks a basket of electric vehicle-related stocks. They can include battery-producing companies and AI-based software companies.

History of the SPDR S&P 500 ETF

The SPDR S&P 500 ETF is the world’s largest ETF and tracks the performance of the S&P 500 stock market index. Initially known only as the Standard & Poor’s Depositary Receipts, it was launched in 1993 by State Street Global Advisors, an asset management company based in Boston, Massachusetts. The ETF was designed by Nathan Most and Steven Bloom. The SPDR S&P 500 ETF is the most widely traded ETF globally, with an average trading volume of 80 million shares.

S&P 500 vs. SPDR S&P 500 ETF

As can be seen from the graph above, the SPDR S&P 500 ETF does an excellent job of closely tracking the S&P 500 stock market index. However, it is not an exact tracker and does occasionally fail to track the S&P 500 effectively. Such errors are very small in magnitude and can be difficult to spot. The easiest way to spot the errors is to graph the two data series (the S&P 500 index and the SPDR S&P 500 ETF) in their first derivatives, i.e., their rates of change.

The blue line and the orange line plot the percentage change in the S&P 500 index and the SPY ETF, respectively. The black line plots the difference between the two series. For example, there is a 0.5% difference between the change in the S&P 500 index and the SPY ETF in June 2019 (marked by a red arrow). In this case, the change in the S&P 500 index was 0.5% more than the change in the SPY ETF.

Related Readings

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To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

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• Vanguard GroupVanguard GroupThe Vanguard Group is a privately-owned investment manager that was founded by John C. Bogle on May 1, 1975. Located in Malvern, Pennsylvania, Vanguard is the largest provider of mutual funds and is the second largest exchange-traded funds provider in the world after BlackRock’s iShares. Vanguard also offers brokerage