Spider Exchange Traded Funds

Investors always look out for innovative investment opportunities.  They want more ease and more convenience in the investment process and less risk for their investments.  Investment companies try to fulfill their need by introducing new products time and again catching the fancy of investors.  Spider exchange traded funds set the ball rolling for the exchange traded fund concept way back in 1993.  Many years have passed since then, but ETFs are only getting more popular with many variations being made in this product to suit the requirements of different kinds of investors.

Exchange Traded Fund (ETF)

An exchange traded fund is a huge pool of investments.  These investments may be in stocks comprising an index, stocks belonging to a particular sector, stocks pertaining to a certain theme and so on.  Or the investments may be in a particular asset class like currency or commodities.  The entire investment basket of the fund is divided into units which can be bought and sold in the market by investors just like individual stocks.  It is thus a product designed to give the investor the best features of stocks as well as mutual funds.

Spider Exchange Traded Funds

The first exchange traded fund came into being in 1993 and it tracked the S&P 500 index.  It was called Standard and Poor’s Depository Receipt and traded on the American Exchange. Its ticker symbol was SPDR and hence began to be called Spider.  This ETF is a basket of S&P 500 stocks and is managed by State Street Global Advisers.  Each unit contains one tenth of the S&P 500 index.
Today there are many versions of this exchange traded fund and they are all called Spider Exchange Traded Funds.  In fact, there is even a Spider exchange traded fund created for the Dow Jones Industrial Average called SPDR Dow Jones Large cap ETF.

These funds can also be traded in the futures and options segment.  Investors can go short, trade call and put options and so on to reduce risk.

Advantages of Spider Exchange Traded Fund

  • Investing in Spider exchange traded funds would be better than individually buying the 500 stocks of the S&P 500 index.  Buying hundreds of stocks and tracking them would be impossible for the individual investor.
  • Also, buying so many stocks would mean a lot of other expenses such as brokerage.  In comparison, buying unit of a exchange traded fund would be a cost effective investment.
  • Today, there are different versions of Spider exchange traded funds for different sectors of stocks belonging to the S&P 500.  Investors can choose a spider ETF specific to a particular sector or market capitalization.  For instance, there is a Spider ETF tracking the Technology Select Sector Index comprising 85 technology stocks.
  • Individual investors who want their portfolios to be passively managed prefer Spider exchange traded funds. They would be investing in good companies and spreading their risks at the same time.
  • These funds are also very popular with large institutions and traders as they can use them to hedge their positions.
  • A person trading in this exchange traded funds can buy and sell the fund units at real time prices in the market as if they were stocks.

Disadvantages of Spider Exchange Traded Funds

  • In the event of a stock market crash, index stocks will fall heavily and investors in Spider exchange traded funds would have to bear huge losses.  They can however mitigate this risk by hedging.
  • These funds would not be suitable for aggressive investors who are not satisfied with returns matching the performance of the underlying index.  These investors would prefer actively managed funds which outperform the market index.

The original Spider exchange traded fund provided the basis for all the ETFs we see today.  Passively managed funds like Spiders which follow market indices are still popular today.