Spiders No Reason For Arachnophobia

Tired of your humdrum investments? Maybe you should buy some spiders - they’re up almost 29 percent this year.

Technically, they’re called SPDRs, for Standard & Poor’s Depositary Receipts. They’re another way for investors to try to match the overall performance of the stock market. They offer some advantages over the index mutual funds that have become so popular in the last few years.

Spiders combine features of a mutual fund with those of a stock. Such “unit investment trusts” purchase baskets of stocks, as mutual funds do, but don’t change, or “manage,” the mix of stocks in the portfolio.

The most popular spider, the SPY, owns all 500 stocks represented in the S&P 500 index, the most widely used market barometer. The SPY was created in January 1993 by the American Stock Exchange, and there are now approximately 11.8 million shares outstanding. At the recent price of $58 a share, there are about $684 million worth of these spiders out there. More than 300,000 shares trade hands each day, making spiders a liquid investment that’s easy to buy and sell.

The Amex launched a second spider in May - the MDY, which owns mid-sized-company stocks of the S&P 400, another market gauge. The MDY has only about $20 million worth of shares outstanding.

Individual investors are responsible for about 35 percent of the spider trading, according to Amex vice president Jay Baker.

Spider shares are traded the same way stocks are, allowing investors to get price quotes and make trades anytime during the day. This is different from a mutual fund, where share price, or net asset value, is calculated only once a day and your purchase is made at the closing price of the day you make your order.

With a spider, you don’t have to fill out an application form as you do before buying shares directly from a mutual fund company. You pay a broker’s commission when buying a spider, which you don’t when buying fund shares directly from a fund company. But you can use a deep-discount broker that might charge a commission of $25 or less.

Spiders are thus better than index funds for active investors who want to move in and out of the market on short-term plays.

But they can also offer some advantages for less active investors with long-term horizons.

Since spiders are traded like stocks, investors can place limit and stop-loss orders, buy on margin, and sell short to profit on a market decline - all things you generally can’t do with mutual funds.

And there is no minimum on a spider purchase - the Vanguard Group’s Index Trust 500, one of the most popular index funds tracking the S&P 500, has a $3,000 minimum for initial investments.

The spider management fee is about two tenths of a percent, about the same as the Vanguard fund’s.

Spiders accumulate the dividends paid by the stocks in the portfolio and distribute them quarterly, less the management fee.

Why invest in a spider - or, for that matter, in an index fund?

Because, like many investors, you may conclude that trying to beat the stock market is just too tough a game. Even the average professional can’t do it, which is why index funds, which try to mimic the market, or portions of it, have attracted so many investors. Even big players are buying into the indexing philosophy. Last month, for example, Intel Corp. announced it was firing the managers for its $1.2 billion pension fund and investing the money in unmanaged index funds.

This year the S&P 500 is up about 26.4 percent. The SPY spider is up 26.7 percent, and the Vanguard Index Trust 500 is up about 28 percent. With dividends reinvested, the S&P 500 and spider are both up 28.8 percent, the Vanguard fund 29.3 percent.