Definition
The SPDR S&P 500 ETF (SPY) is an exchange-traded fund (ETF) that tracks the Standard & Poor’s 500 Index (S&P 500). It does this by holding a portfolio of stocks from companies listed in the S&P 500 index.
How the SPDR S&P 500 ETF (SPY) Works
The SPDR S&P 500 is a unit investment trust, meaning that SPY must attempt to replicate the S&P 500 index in its entirety. Fund managers buy and sell stocks to synchronize their portfolio with the S&P 500 index. When you buy an SPY share, you are purchasing a unit of the current portfolio that represents a small portion of every stock in the S&P 500 index.
Investors buy SPY hoping that the value of the shares in the ETF – the S&P 500 stocks – will rise, allowing them to sell SPY units at a higher price than they paid. If the value of the stocks in the fund decreases, the value of each unit/share of SPY will also decline.
SPY is traded on the stock exchange, so traders can buy or sell their units to or from other market participants. Sometimes, the unit price may not reflect the underlying value of the assets within the unit because the units are traded on the exchange. Panic or fear can cause buyers or sellers to push the price above or below the true value of the underlying assets.
Alternatives to the SPDR S&P 500 ETF (SPY)
Although SPY is the largest exchange-traded fund tracking the S&P 500, it is not 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 (0.03%) than SPY (0.095%) as of January 2023. The expense ratio is the percentage of the fund’s assets used for administrative expenses. It is a fee you pay to buy a professionally managed product. Another competitor, the iShares Core S&P 500 ETF (IVV), also offers an expense ratio of 0.03%.
Source: https://www.thebalancemoney.com/spdr-sandp-500-etf-spy-profile-what-day-traders-trade-1031373
Leave a Reply