What Is the SPDR S&P 500 ETF (SPY)

SPY is one of the easiest ways stock traders can access a stock index

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The SPDR S&P 500 ETF trades under the symbol "SPY" on the NYSEArca exchange. SPDR stands for Standard and Poor's Depositary Receipts.

The aim behind this ETF is to provide an investment vehicle that at least roughly produces returns in line with the S&P 500 Index before expenses. SPY was the first ever ETF listed in the U.S. in January, 1993 when it was introduced by State Street Global Advisors.

The Key Features of SPY

SPY is consistently one of the highest volume trading vehicles on U.S. exchanges. Average volume is typically over 80 million shares, although that does fluctuate over time. For many day traders, it's the only ETF/stock they trade. Many investors and hedge funds use SPY because it represents the S&P 500 index—a basket of 500 major U.S. companies.

The S&P 500 index itself is composed of U.S. companies across all Global Industry Classification Standard (GICS) sectors with a market capitalization of $5 billion or greater. In other words, the index is only composed of big companies. Each company in the index must also have positive earnings in the most recent quarter, as well as over the most recent four quarters.

Each stock in the index must also be actively traded itself. Investors also use the S&P 500 SPDR because it provides exposure to a wide range of large U.S. companies with a single purchase. 

Why Trade the ETF? It's All About Volume

The SPDR S&P 500 ETF is one of the easiest ways for stock traders to access a stock index, which was typically only available to S&P 500 futures traders prior to the SPY inception date. But SPY is more than just access to a major index. Many ETFs offer that and are nowhere near as popular. 

SPY's longevity has resulted in a trusting relationship between traders and those who manage the fund: State Street. Traders are willing to trade the ETF every day, including day traders. They know there will be ample volume there to enter and exit trades. The long-standing high volume encourages trading, and high volume continually produces high volume in this way.

ETF Price Movement

The ETF also has good price movement. It isn't extremely volatile, but it typically moves about 0.5 percent to 1 percent a day as measured by Average True Range (ATR). During times of high volatility, the price might cover a 2 percent range or more per day. Movement of less than 0.5 percent from one day to the next is relatively rare.

SPY moves less than the high volatility day trading stocks, but day traders can take larger position sizes to offset the lower volatility because there's so much volume.

Solid Annualized Returns

Volume is one thing. It attracts short-term and long-term traders alike, but it isn't only the volume that makes SPY attractive to traders. Lots of stocks have high volume for a few days, then they fizzle out. You need a trustworthy product to keep volume.

The S&P 500 index is one of the most recognized stock market benchmarks in the world and SPY tracks it very well. The SPY annualized return was 9.45 percent between Jan 22, 1993, and November 31, 2017, and the annualized return of the S&P 500 Index has consistently been close in line with that.

That's nearly spot on considering that the fund charges a 0.0975 percent expense ratio as of November 2017. Keep in mind, however, that the expense ratio is subject to change.

How SPY Works

The SPDR S&P 500 is a trust unit. 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 on 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.

Day traders don't care whether the index moves up or down. All the stocks in the S&P 500 move all day long, and so does SPY, tracking the worth of the holdings/underlying stocks. Combined with very large volume, those fluctuations allow day traders to actively trade throughout the day.

SPY trades on the stock exchange, so traders can buy or sell their shares/units to or from other market participants. Occasionally, the price of the unit 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 symbol "SPY.NV." It's updated each morning with the value of holdings. NV indicates net asset value.