| Index-Based
Investments SPDRs & MidCap SPDRs -
Q&A
Topics
Introduction
What are SPDRs and MidCap SPDRs?
With Standard & Poor’s Depositary Receipts (SPDRs) and Standard &
Poor’s MidCap 400 Depositary Receipts (MidCap SPDRs), investors can purchase shares
in a diversified portfolio, receive quarterly cash dividends and buy or sell those shares
at any time during the trading day. SPDRs and MidCap SPDRs represent units of beneficial
interest in unit investment trusts that hold the component stocks of the Standard &
Poor’s 500 Index and the Standard & Poor’s MidCap 400 Index, respectively.
SPDRs and MidCap SPDRs trade like shares of common stock and can be traded at any time
during the trading day on the American Stock Exchange. SPDRs trade under the ticker symbol
"SPY" and MidCap SPDRs trade under the symbol "MDY" and are designed
to track the performance and dividend yield of each of the underlying indexes.
Who should invest in SPDRs and
MidCap SPDRs?
By purchasing a share of "the market," investors can instantly gain a
diverse portfolio through some of the most closely followed indexes in the United States.
SPDRs and MidCap SPDRs offer investors a low-cost means to gain either long- or short-term
exposure to the Standard & Poor’s 500 Index and the Standard & Poor’s
MidCap 400 Index, two of the most closely followed benchmarks for the U.S. stock market.
What are the investment
objectives of SPDRs and MidCap SPDRs?
SPDRs and MidCap SPDRs are designed to closely track the performances of the
underlying indexes and pay quarterly dividends that correspond to the dividend yields of
the indexes’ component stocks. Over the long term, the indexes have outperformed most
"active" managers, although there is no guarantee that this will continue. SPY
and MDY market values can be expected to rise and fall along with the indexes themselves.
Are there risks involved in
investing in SPDRs and MidCap SPDRs?
Because SPDRs and MidCap SPDRs represent diversified portfolios, they are subject
to the risk that the general level of stock prices will decline. If the S&P 500 and
S&P MidCap 400 drop, the values of SPDRs and MidCap SPDRs will decline as well. In
addition, the levels of the indexes and the values of SPDRs and MidCap SPDRs will continue
to be reported even if trading is interrupted in some or all of the S&P 500 or S&P
MidCap 400 component stocks. As a result, reported index levels and SPY and MDY price
quotations may at times be based on non-current price information with respect to some or
even all of the stocks in the S&P 500 or the S&P MidCap 400. Trading of SPDRs and
MidCap SPDRs will be halted whenever Exchange trading in equity securities generally is
halted as a result of activation of market-wide "circuit breakers" that are tied
to large decreases in the Dow Jones Industrial Average. Trading in SPDRs and MidCap SPDRs
may also be halted if Exchange officials determine that such action is appropriate in the
interest of a fair and orderly market or to protect investors. Although passive management
and diversification are intended to reduce risk, indexing is not necessarily safer than
active management.
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About the
Indexes
What are the Standard &
Poor’s indexes?
As closely followed benchmarks, the S&P 500 and S&P MidCap 400 indexes are used to
describe the U.S. market for large and medium-sized stocks, respectively. Standard &
Poor’s developed the indexes to perfect a measure of U.S. stock market performance.
The S&P 500 was introduced in 1957 and has become a leading indicator of the U.S.
equity market. The S&P MidCap 400 was introduced in 1991 and has fast become a leading
measure of the mid-sized segment of the market.
How are component stocks
selected? Do they change?
Standard & Poor’s maintains the indexes and selects components by identifying key
industry groups in the U.S. economy and selecting a representative sample of stocks in
each group. Index values are calculated by weighing component stocks primarily on the
basis of relative market value. Components may be added and deleted to ensure the indexes
remain representative of the markets they are intended to track. Lists of current index
components are available from Standard & Poor’s fax-on-demand service at
(800) 758-1344.
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The
Case for Indexing
What are the advantages of SPDRs
and MidCap SPDRs over other equity investments?
SPDRs and MidCap SPDRs offer the ability to instantly invest in shares representing all
S&P 500 or S&P MidCap 400 component stocks in just one trade on the American Stock
Exchange. Unlike most index mutual funds, SPDRs and MidCap SPDRs allow investors to buy or
sell throughout the trading day, are subject to the same rules regarding margin as any
other equity, and can be sold short on a "downtick."
Why invest in an index?
Because index products, including index funds and index-based unit investment trusts, have
beaten most actively managed mutual funds over the long term.
How do indexes beat most actively
managed funds?
Historically, most mutual funds have failed to sustain a level of performance above that
of standardized indexes such as the S&P 500 and S&P MidCap 400. First of all,
active management tends to be more expensive. The cost of research, portfolio management
tools and transaction expenses eat into the returns of actively managed funds. For taxable
accounts (most non-retirement funds), capital gains taxes can further erode a
shareholder’s investment returns. Actively managed mutual funds typically generate
capital gains by buying and selling more often than index funds.
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An Edge
on Indexing
How are SPDRs and MidCap SPDRs
different from mutual funds and closed-end funds?
Unlike open-end mutual funds, SPDRs and MidCap SPDRs trade like stocks, allowing investors
to buy or sell at any time during the trading day. Most open-end index funds process
redemptions based on the funds’ net asset values at the markets’ close and then
mail checks to redeeming investors. In volatile markets, if there is a glut of redemptions
in open-end funds, exchange-traded index products like SPDRs and MidCap SPDRs permit
investors to sell shares during the trading day, not just at the end of it. And whereas
closed-end funds often trade at discounts to their net-asset values, an unlimited number
of SPDR and MidCap SPDR trading units can be created, which helps ensure that they will
correlate closely with the performance of the index component stocks in each trust’s
portfolio.
How do SPDRs and MidCap SPDRs
simplify investing?
Most long-term investors diversify their holdings to reduce risk and seek broad exposure
to all major industries and market sectors. With SPDRs and MidCap SPDRs, investors can
gain these advantages with one purchase and track the performance of the benchmark S&P
indexes.
How do taxes on SPDR and MidCap
SPDR investments compare with those for mutual funds?
Because there is limited purchasing or selling of component stocks by the SPDR Trust and
MidCap SPDR Trust, SPDRs and MidCap SPDRs may be more tax-efficient than many actively
managed mutual funds with higher portfolio turnover rates. Generally, investors in mutual
funds or SPDRs and MidCap SPDRs will pay income taxes on dividends paid by funds and SPY
or MDY. Mutual fund investors will also pay taxes and distributions of net capital gains
by their fund, while SPDR and MidCap SPDR investors pay taxes at applicable capital gains
tax rates on profits from their sale of SPY and MDY shares.
What are the benefits to SPDRs
and MidCap SPDRs trading as stocks?
Listing on the Amex offers several advantages to SPDR and MidCap SPDR investors:
- buy and sell at any time during the
trading day
- instantly acquire a diversified portfolio
- earn quarterly cash dividends
- no sales loads, although commission rates
will apply
- no high management and sponsor fees
- ability to sell short
How can SPDRs and MidCap SPDRs be
sold short?
Since they are listed as stocks, both SPDRs and MidCap SPDRs are eligible for short sales
(selling borrowed shares on the expectation that the price will fall). Short sellers of
listed index shares have an additional advantage: SPDRs and MidCap SPDRs are not subject
to the "uptick rule" that applies to stocks, meaning they can be sold short
regardless of which direction the price is moving, and they are eligible for immediate
margining under the same terms that apply to common stocks.
Can SPDRs and MidCap SPDRs be
used in retirement accounts?
Yes. SPDRs and MidCap SPDRs may be offered through 401(k) retirement plans and they can be
purchased for Individual Retirement Accounts (IRAs), both of which are tax deferred.
Are SPDRs and MidCap SPDRs
eligible for covered call writing?
Investors who own 1,000 SPDR units can sell an SPX call against their holdings, or 10
long-term index share options. Holders can also buy puts against their SPDRs. Investors
who hold 500 MidCap SPDRs have the same opportunities for writing calls on the index
shares as well as buying puts against their MidCap SPDR holdings.
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Investing in SPDRs and MidCap SPDRs
What are the symbols for SPDRs
and MidCap SPDRs?
A current SPDR price quotation is available from market information sources under the
ticker symbol "SPY." Prices for MidCap SPDRs are available under the symbol
"MDY." Several symbols are used to provide other relevant information.
| For
SPDRs |
For
MidCap SPDRs |
| SXV - Intraday Value |
MXV - Intraday Value |
| SXN - Net Asset Value |
MXN - Net Asset Value |
| SXD - Dividend Amount |
MXD - Dividend Amount |
| SXP - Final Quarterly
Dividend Payment |
MXP - Final Quarterly
Dividend Payment |
| SXS - Shares Outstanding |
MZS - Shares Outstanding |
| SPE - Estimated Cash Amount |
MPE - Estimated Cash Amount |
| SPU - Total Cash Amount Per
Creation Unit |
MXU - Total Cash Amount Per
Creation Unit |
How are prices determined for
SPDRs and MidCap SPDRs?
SPDRs are designed to trade at roughly 1/10 the level of the S&P 500. If the Index is
at 1,300, SPY will trade at about $130 per unit. MidCap SPDRs trade at about 1/5 the level
of the S&P MidCap 400 Index. If the Index is at 400, MDY will trade at about $80 per
unit.
Do the values fluctuate?
SPDRs and MidCap SPDRs are subject to economic factors and the vagaries of the market and
therefore can be expected to rise and fall as the indexes fluctuate. Because of factors
such as supply and demand, transaction costs incurred by the trusts and the possibility
that some stocks in the indexes may be temporarily unavailable, the price levels of SPDRs
and MidCap SPDRs may not correspond exactly with the levels of the indexes.
How easy is it to buy and sell
SPDRs and MidCap SPDRs? Where can I buy them?
SPDRs and MidCap SPDRs trade with the ease and efficiency of any stock listed on the
American Stock Exchange. Just ask, and your broker can purchase SPDRs and MidCap SPDRs for
your account. Brokerage commission rates will apply to purchases and sales of SPDRs and
MidCap SPDRs.
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SPDR and MidCap SPDR Trust Expenses
What are the expenses? Are there
sales charges?
Trust expenses for SPDRs and MidCap SPDRs are generally lower than the management fees for
most competing mutual funds currently on the market. Annual expenses for SPDRs are 0.18%;
for MidCap SPDRs, annual expenses are 0.30%. In other words, the annual cost of a $10,000
investment in SPDRs would be $18.00, and the annual cost of the same size investment in
MidCap SPDRs would be $25.00. SPDRs and MidCap SPDRs are subject to ordinary brokerage
commissions, which vary among brokers.
How do the fees and expenses
compare to mutual funds?
Fees for SPDRs and MidCap SPDRs are expected to be lower than competing mutual funds based
on large and medium-sized stocks, and, since they do not incur high management and sponsor
fees, they are expected to continue to be among the least expensive of these types of
investments. SPDRs and MidCap SPDRs do not carry sales loads, as do many mutual funds, and
do not charge "12b-1" fees for marketing, a "hidden" cost in some
mutual funds. Funds also may or may not be subject to commissions, depending on whether
they are purchased through a broker. These commissions may be higher or lower than
commissions your broker charges for buying and selling SPDRs and MidCap SPDRs for your
account.
How do the expenses compare to
actively managed mutual funds?
Fees for funds that are passively managed are typically lower than actively managed funds,
since they usually require fewer investment, research and trading decisions. Active
managers often incur heavy research expenses and transaction costs, which vary with
portfolio turnover rates. Many equity mutual funds’ expenses run between 1.0% and
1.5% per year.
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SPDR and MidCap SPDR Performance
How closely correlated is the
performance of SPDRs and MidCap SPDRs with the underlying indexes?
SPDR and MidCap SPDR performance can be expected to closely replicate the performance of
the underlying indexes. Because the SPDRs and MidCap SPDRs trust portfolios are comprised
of the component stocks of the S&P 500 and S&P MidCap 400, respectively, they are
expected to closely follow fluctuations in the indexes. However, there is no assurance
that this level of correlation can be maintained or will continue. Click on SPY or MDY for
a comparison of SPDRs and MidCap SPDRs with their respective underlying indexes.
How can the performance of SPDRs
and MidCap SPDRs diverge from the underlying indexes?
Because the underlying S&P 500 and S&P MidCap 400 indexes are not investment
instruments, they incur no expenses, which are therefore not reflected in the index
values. The net asset values of SPDRs and MidCap SPDRs reflect trust expenses and include
accrued dividends. The indexes do not take accrued dividends into account. Also, over
time, SPDRs and MidCap SPDRs may be rebalanced to reflect changes in the indexes and to
ensure proper security weightings as the prices of underlying stocks change. The resulting
transaction costs are incurred by the SPDR and MidCap SPDR portfolios but not by the
underlying indexes.
Why can SPDRs and MidCap SPDRs be
expected to closely track the index levels?
Unlike closed-end funds, SPDRs and MidCap SPDRs can be expected not to trade at
significant premiums or discounts to the trusts’ net asset values because
arbitrageurs - traders who profit from small price differences - keep the prices close to
their target index levels. These traders watch the price and index levels closely to
profit from any divergence.
Where can I get up-to-date price
information?
Any place that offers stock quotes will also carry current market prices for SPY and MDY.
Pricing is continual during normal trading hours. Live quotes are available on a brief
delay on this site. Click the link for SPY or MDY quote.
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Income from SPDRs and MidCap SPDRs
Do SPDRs and MidCap SPDRs pay
dividends or capital gains?
Both SPDRs and MidCap SPDRs pay quarterly dividends and may make annual capital gains
distributions.
Can dividends be reinvested?
Dividend reinvestment programs are available for both SPDRs and MidCap SPDRs through
participant brokers in The Depository Trust Company (DTC) Dividend Reinvestment Service.
Ask your broker whether the DTC Dividend Reinvestment Service is available.
What is included in accrued
income?
Accrued income for SPDRs and MidCap SPDRs includes dividends and capital gains.
Is there withholding tax on
income? What are the federal income tax implications of dividend and capital gains
distributions?
Withholding tax on dividend distributions will generally not be required except in certain
instances. Capital gains, if any, are not subject to withholding tax but are subject to
the applicable capital gains tax rate. For further information, see the discussion of
taxes in the prospectus or consult your tax advisor.
Do investors receive the gross
amount of SPDRs’ and MidCap SPDRs’ dividends and capital gains?
SPDR and MidCap SPDR expenses are deducted against all income and capital gains. Investors
receive net income and capital gains.
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Where do SPDRs and
MidCap SPDRs come from?
How are SPDRs and MidCap SPDRs
created and redeemed?
Most SPDR and MidCap SPDR holders buy and sell in the secondary trading market. But units
are initially created when they are issued by the trusts to an investor who, after placing
an order, deposits with the trustee a specified number of shares of index stocks and cash
equal to accumulated dividends. While investors can trade any amount of SPDRs and MidCap
SPDRs, they can only be created and redeemed from the trusts in "creation units"
of 50,000 SPDRs and 25,000 MidCap SPDRs (or multiples thereof).
What are "creation
units?"
A creation unit is simply a specified number of SPDR and MidCap SPDR shares. A SPDR
creation unit consists of 50,000 SPDRs, and a MidCap SPDR creation unit consists of 25,000
MidCap SPDRs. SPDRs and MidCap SPDRs can be created or redeemed only in aggregations of
50,000 SPDRs and 25,000 MidCap SPDRs (or multiples thereof).
Who can create them?
An investor who makes a deposit of the required securities and cash, as well as the fees
to cover transaction costs, is eligible to create SPDR and MidCap SPDR units.
How are creation units issued and
redeemed?
The SPDR Trust and MidCap SPDR Trust issue SPDRs and MidCap SPDRs through the distributor
at net asset values determined on receipt of an order.
What are the costs involved in
creating and redeeming creation units?
Investors who create or redeem SPDRs or MidCap SPDRs (or multiples thereof) must pay fees
to cover transaction costs and expenses related to transferring securities to or from the
trusts to investors’ accounts.
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SPDR and MidCap SPDR
Administration and History
When were SPDRs and MidCap SPDRs
introduced?
The Amex began trading SPDRs on Jan. 29, 1993. The Exchange introduced MidCap SPDRs on May
4, 1995.
Who issues SPDRs and MidCap
SPDRs?
The SPDR and MidCap SPDR trusts are sponsored by PDR Services Corporation, a wholly owned
subsidiary of the American Stock Exchange. The distributor is ALPS Mutual Funds Services,
Inc., a registered broker-dealer, member NASD.
Who are the trustees?
The trustee bank for SPDRs is State Street Bank and Trust Company; for MidCap SPDRs, the
trustee is The Bank of New York.
For more information about SPDRs and
MidCap SPDRs, including charges and expenses, ask for a prospectus from PDR Services
Corporation, 86 Trinity Place, New York, NY 10006-1872. Or call (800) THE-AMEX. Read it
carefully before you invest.
"Standard & Poor’s,®"
"S&P®," "Standard & Poor’s Depositary Receipts®,"
"SPDRs®," "MidCap SPDRs," and "S&P MidCap
400" are trademarks of The McGraw-Hill Companies, Inc., and have been licensed for
use by PDR Services Corporation and the American Stock Exchange, Inc. SPDRs are not
sponsored, endorsed, sold or promoted by S&P, a division of The McGraw-Hill Companies,
Inc., and S&P makes no representation regarding the advisability of investing in SPDRs
or MidCap SPDRs.
Past performance is not indicative of
future results. Creation Units, when redeemed, may be worth more or less than their
original cost.
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