With the rise of ETF’s, the SPY (SPDR S&P 500 ETF Trust) has taken center stage. So what is the SPY stock, how do we trade it and where can I find it? The SPY is an ETF that represents the S&P 500, replicating the index movement. The S&P 500 being the main benchmark in the United States, the SPY replicates the sectors very closely to that of the S&P 500. Listed on the NYSE, the SPY is a unit investment trust. This means it has a fixed portfolio of assets. Where can you trade the ETF? Anywhere, on almost all platforms. The SPY trades like a stock and it is even optionable! (discussed in later sections).

SPY Stock- Specs

The SPY ETF has $260.77 billion worth of net assets, and approximately 938 million shares outstanding. The substantial amount of shares outstanding validates the liquidity of the market, along with the average volume of 93.31 million shares traded a day. Since it was created to reflect the S&P 500 index, it has a beta of 1.00. Meaning it moves lockstep with the S&P 500.

The SPY ETF is not the only of its kind, there are other ETF’s that are based on the S&P 500, such as the Vanguard S&P 500 ETF. ETF’s do have expense ratios, are the SPY expense ratio can be considered higher than other SPY expense ratios. Not to be confused, the SPY ETF expense ratio is low compared to the standard ETF expense ratio. The SPY has an expense ratio of 0.0945% while the Vanguard counterpart has an expense ratio of 0.04%.

The SPY ETF is distributed by ALPS Distributors Inc. While it’s trustee is State Street Bank and Trust Co. SPY has multiple holdings, the main ones are listed below, check out the comparison between the SPY and the S&P 500 index main holdings. SPY has a total of 506 holdings compared to the 505 in the S&P 500, meaning they have the same stocks within each. The fact that there are over 500 symbols listed in either is that some companies have multiple class shares. Such as Google, which has the GOOG Class C and the GOOGL Class A.

Notice something? There is only one table below, that is because the stocks listed and their respective weight for the S&P 500 and the SPY are the same. If you have interest in all of the stocks listed on either of the SPY or S&P 500, click here. 

SPY vs S&P 500, discrepancies?

Take a look a the chart below that reflects both the S&P500 and the SPY. See a difference? Barely. The orange line represents the SPY and the green the S&P 500. The different is usually more pronounced on moves higher in which the SPY outperforms the S&P 500 ever so slightly, which can be reflected in the expense ratio of the SPY.

SPY Stock- Returns and potential

Ever since the introduction of ETF’s to rival index funds in 1993, the SPY has been an accessible way to get into the indices. Meaning the ability to short them and essentially trade them like stocks. But how has the SPY performed in term of gains? Well considering the chart above, as well as the S&P500. Meaning the potential of a higher ROI! Put down less for more!

Since 2015, the SPY has gained 36.60%, gaining 14.80% this year alone as of March 29th, 2019. On average the exchange-traded fund has earned 9.7% in annual returns. There have been trials and tribulations in the SPY ETF as well, gaining nearly 440% from its peak low in 2009 at $67.10 to its peak high in September 2018 at a high of $293.94. The SPY ETF is susceptible to swings high and low, considering it has a beta of 1.0 and holds the same stocks the S&P 500 does, replicating weight as well. If there should be a market crash the SPY will get hit as well. However, new highs on the S&P 500 means new highs in the SPY ETF.

SPY Stock-Trading the ETF

Mentioned above, the SPY yield the same returns, if not better than the S&P 500 for less capital down. So the next question is how does one trade the SPY? There are multiple options, the most obvious is purchasing or short selling shares of the SPY itself through a broker. However, there is another way. Options! The SPY ETF is optionable, which presents traders and investors access to the SPY and in turn the S&P 500 for less! Trading options on the ETF mitigate the expense ratio and leverage is increased.

The risk of purchasing calls or puts on the SPY is limited to the premium put down to purchase the options contracts. While the return can be exponential, let’s take a look at buying SPY calls vs buying the outright SPY shares. Using the options chain below, assuming that we’ve purchased 5 contracts of the May 2019 280 SPY call options. They cost $7.64, or (5×7.64×100)= $3,820 for the whole position. Which would mean that the break-even point is $287.60 at expiry?

Considering all of the variables in terms of greeks and time to expiry, the following chart represents a profit and loss diagram of the potential of this options trade on the SPY. Check out the following website to get access to this information.

Let us continue with our assumptions, in order to compare the two options, we will have to have a set imaginary price at a set time in the future. Assuming the SPY is at $290 by April 16th. What will be the difference in return between the options and the flat out shares purchased? By then, the options position would have increased by $52.6% or $2010.

Alternatively, if we had purchased the SPY at the current market price, $282.62. Assuming 500 shares purchased and sold for $290. We could assume these shares were bought on margin at 30% for simplicities sake. That means the money put down is 500x$282.62×0.30 = $42,393. Even with margin, you would need 11 times more to purchase the shares. The return being (290-282.62)*500=$3,690.

On the margined position that is a return of 8.70%, which pales in comparison to the options position. That is the power of leverage. There are several other ways one can take advantage of the SPY movement such as credit or debits spreads, all available in our options course in depth. 

Final Thoughts

The SPY, being derived from the S&P 500 index itself is affected by many things. Mainly those that affect the US economy as a whole, which includes but is not limited to currency risk, interest rate risk and currently a very important event the US/China trade talks. There is a lot of positives and possibilities in trading the SPY through options as well, limiting exposure and larger access to exponential returns on your investment. All of which is discussed in our options course, linked below.

The most important thing that you can do now to cut down your learning curve is to find a mentor and join a community of professional traders.

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The information contained in this post is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.