All, about spiders from Barrons...
They can be shorted!
Monday, July 28, 1997
Well-Kept Secrets
Spiders mimic S&P Index funds,
Trade like stocks
By Andrew Bary
One of the biggest stories in the investment world in the past few years has
been the growth and performance of mutual funds linked to the Standard &
Poor's 500 index. But with little fanfare, securities that provide another way to
achieve the same end also have grown popular. The securities are S&P 500
depositary receipts, nicknamed Spiders, which trade actively on the American
Stock Exchange. Spiders amount to an S&P 500 index fund, mimicking the
performance of the widely followed stock-market benchmark, which has
gained 26% in 1997 and beaten more than 90% of fund managers in the past
three years.
"The easiest and quickest way to gain broad exposure to the market is
through Spiders," says Michael Schwartz, chief option strategist at
Oppenheimer & Co.
"It's an index fund that trades exactly like a stock. Liquidity is fantastic."
Spiders (ticker SPY) represent an interest in a unit trust that holds the 500
stocks in the S&P. Each share represents 1/10th of the index's value. With
the S&P 500 closing Thursday, for example, at 940, the Spiders finished the
day at 94, up from 73 7/8 at the start of the year.
Given the booming popularity of conventional S&P index funds, it's little
wonder that Spiders, abbreviated SPDR in newspaper stock listings, have
been the Amex's biggest success story. Volume lately has averaged 2.5
million shares daily, and hit 4.2 million Tuesday when the Dow Jones
Industrial Average rose 155 points.
There are about 36 million Spiders outstanding, totaling $3.3 billion. That's
small potatoes compared with the $44 billion Vanguard Index 500, the
dominant S&P 500 index fund, but the Spider market's size has risen from $2
billion at the start of the year and $1 billion on Jan. 1, 1996.
Spiders haven't
gotten much
attention
because the
Amex doesn't
have a huge
marketing
budget and
because the
major
brokerage
firms haven't
gone out of
their way to
inform their clients about an investment that competes directly with their own
mutual funds, which are much more lucrative for the firms and individual
brokers. "It's the ultimate one-decision stock," says one money manager.
The success of Spiders bodes well for the unit trusts based on the Dow Jones
Industrial Average that the Amex plans to launch late this year or early in
1998, pending approval from the Securities and Exchange Commission. The
Dow unit trusts, expected to be called Diamonds, are likely to be set at
1/100th of the DJIA's value, or about 81 per share, based on the Dow's
close Friday. The S&P remains the benchmark for investment professionals,
accounting for 70% of the $9 trillion capitalization of the U.S. stock market,
but the Dow is far better known than the S&P among retail investors. The
current companions for Spiders at the Amex are S&P Mid-Cap securities,
which track the performance of the S&P Mid-Cap 400 index.
What are the advantages of Spiders versus index funds? Spiders can be
bought and sold at any time during the trading day, and in fact, change hands
until 4:15 p.m., 15 minutes past the regular market close. Index funds can be
transacted only at the closing level of the S&P index. "The mutual funds say
this doesn't matter. But I believe it's important to be able to take advantage of
sharp intraday moves," Schwartz observes.
The annual fee on Spiders is a rock-bottom 0.18 of a percentage point, even
lower than the 0.20% charge on the Vanguard Index 500 and about a full
percentage point under the levy on the typical mutual fund. Dividends are paid
quarterly and the payout is now 1.5%, reflecting the S&P's record-low yield.
Like index funds, Spiders offer tax benefits because the low turnover within
the ranks of the S&P results in minimal realization of capital gains. And Amex
officials assert that the structure of Spiders makes them even more
tax-efficient than the Vanguard fund, which has a big embedded capital gain.
Spiders can be bought on margin, like regular stocks; individuals don't need
special options or futures accounts to purchase them. And they can be sold
short by those wanting to bet against the market or to protect gains in their
portfolios.
S&P 500 depositary receipts appeal to short-sellers because they can be
shorted in falling markets when "downticks" occur, meaning the last price is
lower than the prior one. Exchange-traded stocks, in contrast, can be shorted
only on price increases, or "upticks," making it hard for shorts to execute
trades when they most want to act -- when markets are plunging. The short
interest in Spiders is hefty at six million shares, but is little changed in the past
few months.
Many investors take a buy-and-hold approach to Spiders. For others,
Spiders are a trading vehicle, as evidenced by the high daily volume. Spiders
appeal to traders because of their high liquidity, a result of the ability of the
Amex specialist to lay off risk in the S&P 500 futures market. The spread
between the bid and asked price generally is one-eighth of a point or less, and
the specialist, Spear Leeds & Kellogg, typically makes markets at those
spreads for 100,000 shares.
This makes Spiders more liquid than virtually all individual stocks, and even
more liquid, some pros say, than S&P futures.
"You can trade half-a-million to a million Spiders with no problem," says
Anthony Soslow, a portfolio manager at RTE Asset Management in Rydal,
Pa. He adds that many clients can't hold futures or are uncomfortable buying
them. So Spiders offer an alternative.
The main drawback of Spiders versus index funds is commissions. Investors
generally don't pay any fees for index funds. But Spiders can't be obtained
free. Discount brokers charge as little as $10 to buy 100 shares of Spiders,
while full-service houses charge around $100. Even at $100, the commission
amounts to just 1% of the purchase price, comparable to the annual fee on
most mutual funds.
With the market at such lofty heights, there's clearly risk in buying the S&P.
And many pros argue that the index, dominated by big companies like
General Electric, Coca-Cola, Intel and Microsoft, has gotten overvalued
relative to the rest of the market. That may be true. But over the last 10 years
-- especially the past three -- as that criticism has surfaced time and again, the
index has beaten the vast majority of money managers.
|
