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

Definition & Examples of the SPDR S&P 500 ETF (SPY)

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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.

Learn more about the SPDR S&P 500 ETF (SPY) and how it works.

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

The aim of the SPDR S&P 500 exchange-traded fund (ETF) is to provide an investment vehicle that roughly produces returns 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 S&P 500 index—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 $8 billion or greater. Each company in the index must also have positive earnings in the most recent quarter and over the most recent four quarters.

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 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 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.

The SPY net asset value (NAV) between inception on Jan 22, 1993, and July 31, 2020, was 9.63%, and the annualized return of the S&P 500 Index over the same period was 9.76%.

SPY trades on the stock exchange, so traders can buy or sell their shares/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 than SPY (0.03% vs. SPY's 0.09%).  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%.

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 roughly produce returns 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. 

Article Sources

  1. State Street Global Advisors. "SPDR S&P 500® ETF Trust." Accessed Aug. 8, 2020.

  2. ETF.com. "SPY SPDR S&P 500 ETF Trust." Accessed Aug. 8, 2020.

  3. S&P Dow Jones Indices. "S&P 500," Page 1. Accessed Aug. 8, 2020.

  4. Yahoo! Finance. "SPY.NV." Accessed Aug. 8, 2020.

  5. U.S. News and World Report. "Vanguard S&P 500 ETF." Accessed Aug. 8, 2020.

  6. iShares. "iShares Core S&P 500 ETF." Accessed Aug. 8, 2020.