What Are Spiders in the Stock Market?

by Nicole Crawford

Spiders may sound like intimidating stock options, but in reality they are one of the most actively traded stocks, according to an article in "Investments and Portfolio Performance." The term spider is actually a common expression for Standard & Poor’s depository receipt. (SPDR)

Identification

Spiders were introduced in 1993 as a way for investors to conveniently follow the Standard and Poor's 500 Index. The Standard and Poor's 500 provides access to 500 of the United States' leading companies, and accounts for 75 percent of U.S. equities, according to the McGraw-Hill Companies. Since their introduction, spiders have become one of the most common exchange-traded funds (ETFs), and they are used by companies and institutions as well as individual investors.

How They Work

Each spider represents about 1/10 of the current value of the S&P 500. As noted by Investopedia, spiders are ideal stocks for investors who follow passive investing principles. Unlike traditional funds, which trade at the close of the day through one fund company, spiders can be traded throughout the day. Due to the versatility and liquidity of spider funds, large institutions sometimes use spiders to place bets about the future direction of the stock market.

Benefits

As noted in "Investments and Portfolio Performance," spider funds are particularly beneficial for short-term trading and risk control. This is primarily due to their organizational structure, which allows for fluidity in the face of unpredictability. Although they can be traded in the same day, you can also hold onto spiders for long-term investments. However, they are most commonly used as a short-term fund and tend to be used frequently in turbulent stock market conditions. Spiders also have mitigated taxes and very minimal maintenance cost.

Drawbacks

Spiders are in direct competition with Standard and Poor's index funds, and although they have some advantages over index funds, they are weaker on a few points. Spider funds have slightly higher commission costs than some types of mutual funds, such as Vanguard. For this reason, they are less desirable for investors that are investing less than $100,000, according to Mike Maloon of California Financial Advisors in a "New York Times" article. Although spiders are ideal for seasoned investors who know how to handle the fund's liquidity, other less experienced investors may have a difficult time using spiders effectively.

About the Author

Nicole Crawford is a NASM-certified personal trainer, doula and pre/post-natal fitness specialist. She is studying to be a nutrition coach and RYT 200 yoga teacher. Nicole contributes regularly at Breaking Muscle and has also written for "Paleo Magazine," The Bump and Fit Bottomed Mamas.

Photo Credits

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