What Are Spiders in the Stock Market?
The original Standard & Poor’s Depositary Receipt, or SPDR, was an investment product launched in 1993 that tracked the S&P 500 stock index. It trades on the American Stock Exchange under the ticker symbol SPY, and is frequently known as the spider, or “spyder.” The stock index is just a weighted average of the individual components, not an investment vehicle itself, but the spider allowed investors to track the index with a single product, rather than buying all 500 stocks in the index or a mutual fund. The concept was so popular that State Street, the manager of the SPY, launched new funds that tracked individual sectors of the S&P 500 and rebranded some of its existing funds. Collectively, this family of funds are known as the spiders.
The spiders trade like stocks, but are actually unit investment trusts whose shares trade in the public stock market. Each fund is a fixed and unmanaged basket of stocks that rise or fall in value according to the performance of their assets and investor interest in the fund itself. State Street Bank & Trust of Boston actually owns the stock that’s divided into the individual shares investors trade as spiders. The bank pays the dividends to unitholders (less a management fee) based on the actual stocks represented by each fund, which is designed to track the performance of a particular niche of the market. The original spider, SPY, for example, usually trades at roughly one tenth of the S&P 500 index.
Some of the most common sector spiders (and their ticker symbols) include SPDR Consumer Staples (XLP), SPDR Technology (XLK), SPDR Homebuilders (XHB), SPDR Biotech (XBI), SPDR Metals and Mining (XME), SPDR Oil & Gas Exploration & Production (XOP), SPDR Pharmaceuticals (XPH), SPDR Retail (XRT), and SPDR Semiconductor ETF (XSD). Within each spider is a group of stocks representative of that sector. So, for example, each unit of XLK is backed by an ownership stake in Microsoft, IBM, Apple, Intel and several other technology companies.
Investors use the spiders for both dividend income and capital appreciation. Because investors tend to favor entire sectors of the economy at any given time, the sector spiders make it easy to gain exposure to a sector without taking on the risks associated with buying shares of a single company. This, along with their liquidity, makes them ideally suited for speculation.
Unlike index-tracking mutual funds, which are only priced at the end of each trading day, the spiders can be traded actively all day long while the market is open. This allows nimble traders to capitalize on market volatility and increase their profitability. Another benefit the spiders have over mutual funds, is that the selling of shares by other unitholders does not have tax consequences. Because the actual shares held in trust never change hands, only the buyers and sellers in individual transaction experience tax gains or losses. In a mutual fund, the manager might have to sell stock to raise funds if many investors redeemed their contributions, creating tax liabilities that eat into the overall fund’s performance.
One of most important considerations regarding the spiders is that they are only correlated to their intended sector, index, or other niche market by the rational participation of investors. In others, there’s no explicit guarantee that a technology spider will track the actual performance of technology stocks other than the operation of buyers and sellers in the market. Though some arbitrage efforts are employed to help prevent a significant deviation, because the market value of the spiders is not firmly pegged to any other asset, their correlation tends to fluctuate.