New York - Some investors believe that index investing (investing in mutual funds that track specific market indices) are the most cost efficient investment strategies. Index mutual funds have low management fees and low turnover because they don't change unless the underlying index adds or subtracts a new stock.
Spiders are an alternative to index mutual funds. Spiders standard for "Standard & Poor's Depositary Receipts." Spiders in essence represent a trust that own the stocks of the S&P and are designed to be worth one-tenth of the daily quoted value of the S&P 500. They trade on the American Stock Exchange under the symbol SPY.
The following are the major differences between Spiders and Index funds?
- Liquidity - Spiders can be purchased any time during the day at the immediate market price. Spiders also can be purchased with stop or limit orders. Index funds can only be purchased or sold at the closing price the day you buy or sell it.
- Dividends - Spiders pay dividends from stocks held on scheduled quarterly payout dates; hence, investors can't reinvest the proceeds immediately. In addition, Spiders do not automatically reinvest dividends as you can for free with most index mutual funds.
- Expenses - Management fees are generally comparable for Spiders and Index funds.
- Commissions - Spiders require a commission to buy or sell while most index funds can be purchased for no transaction fee.
- Minimum Investments - Although some index funds require minimum investments, Spiders can be purchased in any lot size.
- Short Selling - Spiders can be used for short-selling with no up-tick rule; hence, you do not need to wait for an up-tick in price to sell them.
Given the fact that Spiders are more complex investments to understand - most investors considering index investing should stick with index-based mutual funds.
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