As a small business owner, you want every dollar earned to be working for you. But running a business takes focus, and most entrepreneurs don’t have time to track the performance of individual stocks, bonds or other investment vehicles. Mutual funds offer a possible solution, but their fees have a way of devouring profits. So, what’s an entrepreneur-turned-investor to do?
One possible solution is to invest in exchange-traded funds (ETFs), which have been a popular, less expensive alternative to mutual funds over the past 23 years. Better yet, consider SPDR ETFs as a way to diversify and grow your wealth.
In 1993, Standard & Poor’s depositary receipt exchange traded funds (SPDR ETFs or “spiders”) debuted on the American Stock Exchange as a convenient and cost-effective way to trade all 500 equities comprising the S&P 500. For every share of the traditional SPDR ETF held, investors actually had a stake in all 500 companies.
As a recent Investopedia report explains:
“Shares of a spider ETF differ from mutual fund shares in that, unlike mutual funds, spider ETF trust shares are not created for investors at the time of their investment. SPDRs have a fixed number of shares that are bought and sold on the open market. This is because SPDR ETF shares represent proportional interest in the unit investment trusts that hold the stocks of each of the underlying indexes that they represent.
“Because these shares represent interest in the underlying unit investment trusts, holders of SPDR shares have some voting privileges. Rather than voting on proxies that pertain to all of the underlying stocks of an index, however, spider owners vote on special proxies that represent the unit investment trust.”
Investors soon flocked to SPDRs, pouring huge sums of money into the investment vehicle and paving the way for growth and specialization.
As spiders grew in popularity, new SPDR ETFs were rolled out to appeal to a variety of investor interests. These newer offerings provided an easy way for investors to target their investments according to capitalization, such as mid-caps or large caps, as well as by sector, such as the healthcare or financial sectors.
Other SPDRs soon followed, including the SPDR Dow Jones Large Cap ETF, which retained the name “SPDR” despite having no connection to the S&P 500 Index. Today, there are many SPDR funds tracking indexes all over the world, and they’re holding their own as an investment strategy of choice.
How Spiders Work
If you’re keen to invest in SPDRs, you can find them trading on the secondary market, with ticker symbols that are not unlike what you’d expect to find when looking up individual stocks. However, the price you pay will equal the net asset value (NAV) at the time of purchase.
Even when selling, the redemption price will be determined by the NAV, and the value of any given SPDR ETF unit will fluctuate according to the activity of the underlying index.
“Traditional SPDRs, for example, trade at approximately one-tenth of the level of the S&P 500,” states the Investopedia report. “If the S&P 500 is at 1,800, for example, the SPDR ETF shares will trade at $180 per unit. However, mid-cap SPDRs trade at one-fifth of the level of the Mid-cap 400 Index. If that index is at 300, the SPDR will trade at $60 per unit.”
Spiders Are Nimble
Similar to individual stocks, SPDR ETFs can be optioned, sold short and traded on the futures market. That means investors can speculate on the direction of the market. Doing so can be a gamble, but it can also help lower risk in your portfolio.
For example, let’s say you invested in the S&P 500 SPDR ETF. As long as the S&P 500 Index increases, you’ll make money. If the index drops, you’ll lose money—unless you hedged your bets by selling the SPDR short or selling S&P 500 futures contracts. There are some more advanced ways to use SPDRs to hedge the market as well.
Pros and Cons of Spiders
SPDR ETFs provide solid upside potential because they’re able to keep pace with an entire index’s performance, and very few investors possess the skills and discipline required to beat an index.
Spiders also offer great flexibility, since you can opt to either diversify through one of the broad-based indexes, or target your investments by sector or capitalization. Plus, they’re a great tool for hedging against downside risk.
As far as cons are concerned, there’s always the possibility that you’ll buy into a SPDR ETF just as the index it’s tracking takes a nosedive, in which case, you could lose money if you fail to hedge your position.
Also, there are investment managers out there who consistently outperform a given index. So, by putting your money in a SPDR ETF that tracks a specific index, you could lose out on the gains you would have received if you had invested with an outstanding investment manager.
But if your goal is to build wealth without having to track and obsess over individual investments, SPDR ETFs warrant serious consideration and a conversation with your financial advisor.
Like any investment, spiders may not always deliver as expected, but their versatility and ability to mirror an entire index’s performance make them a useful tool for growing wealth.