A Look Inside the Popular SPDR S&P 500 ETF (SPY)

Learn more about SPY, a popular ETF among day traders and investors

SPDR S&P 500 500 EFT (SPY)
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The SPDR S&P 500 ETF, which trades under the symbol SPY on the NYSEArca exchange, is consistently one of highest volume trading vehicles on US 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, and many investors and hedge funds use it because it represents the S&P 500 index - a basket of 500 major US companies.

SPDR stands for Standard & Poor's Depositary Receipts.

Here's a look at the ETF in more detail, as well as why it's so popular (see Most Popular Stocks and ETFs for Day Trading for other trade ideas). 

Volume Begets 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 1993 (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 has been around since 1993, which has resulted in a trusting relationship between traders and those that manage the fund: State Street. 

Traders every day are willing to trade the ETF, including day traders, because they know there will be ample volume there to enter and exit trades. The long-standing high volume encourages trading, and in this way high volume continually produces high volume.

 

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

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

What's In the SPDR S&P 500 ETF

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

SPY tracks the S&P 500 index, one of the most recognized stock market benchmarks in the world. And it tracks it very well. Between Jan 22, 1993 and August 31, 2015 the annualized return of the S&P 500 Index is 9.38% and the SPY annualized return is 9.24%, according to StateStreet. That's nearly spot on, considering the fund charges a 0.09% expense ratio (subject to change).

The S&P 500 index itself is composed of US companies, with 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 recent quarter as well as over the most recent four quarters (summed). Each stock in the index must also be actively traded itself. 

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. 

By buying a share of SPY you're buying a unit of the current holdings, which represents a small portion of each stock on the S&P 500 index. 

Investor's buy SPY hoping the holdings within the fund--the stocks of the S&P 500 index--will rise, which will allow him/her to sell their shares (SPY units) at a higher price than what they paid. If the holdings within the fund fall, so will the value of each unit/share of SPY.

Day traders don't care whether the index moves up or down. Since all the stocks in the S&P 500 move all day long, so does SPY, tracking the worth of the holdings/underlying stocks. Those fluctuations in SPY, combined with very large volume, allow day traders to actively trade throughout the day (see Best Times to Day Trade Stocks).

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 may not reflect the underlying value of the holdings within a unit. This is because the units are traded on an exchange, and euphoria or fear could cause buyers or sellers to push the price above/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, and is called Net Asset Value.

Final Word on SPDR S&P 500 ETF (SPY)

The ETF tracks a widely used index, tracks it well, has been around since 1993. The ETF has loads of volume, and that's why many day traders trade this asset every day. Investors also use the S&P 500 SPDR, as it provides exposure to a wide-range of large U.S. companies with a single purchase.