SPDRs vs. Index Mutual Funds

Understanding Vehicular Pros and Cons

By Dr. David Edward Marcinko MBA CMP™

www.CertifiedMedicalPlanner.org

[Publisher-in-Chief]

It is possible to buy or sell during a trading day with SPDRs, just as one would with a common stock, and, accordingly, the trading price may be set anytime during the day. This could prove valuable in a sudden market downturn. Also, they may be traded using the same types of orders used for stocks (market, limit, at the close, and at the opening) and sold short, even on a downtick.

However, dividend reinvestment is provided by only a few brokers. Since SPDRs represent passive equity portfolios, they tend to be fully invested in the stock market, which removes a significant drag on performance; their expense ratios are significantly below that of stock mutual funds in general, and below many index mutual funds; and they have virtually no turnover and accordingly, minimal capital gains.

Index Mutual Funds

Index funds, on the other hand, may only be purchased or redeemed at the net asset value (NAV) at the end of the trading day. Short sales are not possible; however, dividend reinvestment is available.

The Disadvantages

On the down side, SPDRs are sold like common stocks and, therefore, incur brokerage commissions, but this can be minimized by using discount brokers. SPDRs have been so successful that both the American and New York Stock Exchanges launched internationally indexed products modeled after SPDRs in the spring of 1996. They are termed World Equity Benchmark Shares (WEBS) and Country Baskets.

Note: “Index Stocks: An Introduction to SPDRs—S&P 500 Depository Receipts,” Robert T. Kleiman, in his article, AAII Journal, January 1997, pp. 23–26, American Association of Individual Investors [312] 280-0170).

Conclusion

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4 Responses

  1. Bogle’s Proposal Could Save Investors Billions In Hidden Costs

    John Bogle’s call for anyone providing retail investment advice to be a fiduciary could save big money for mutual fund shareholders, says a finance professor.

    http://www.fa-mag.com/news/bogle-s-call-for-funds-to-meet-fiduciary-standards-could-save-investors-billions-in-hidden-costs-13431.html?section=121

    Dr. David Edward Marcinko MBA CMP™
    http://www.CertifiedMedicalPlanner.org

    Like

  2. Index Funds

    Is it true that if everybody indexed it would stop working … just asking.

    Joseph

    Like

  3. More On Mutual Funds

    Fund investors may face a bigger tax bill for 2013.

    http://money.msn.com/business-news/article.aspx?feed=AP&date=20131024&id=17035678

    Dr. Gupta

    Like

  4. Vanguard’s Bogle: ‘Index Funds Have Gone Too Far’

    Dr. Marcinko – “I can’t think of a worse way to invest,” Vanguard founder John Bogle says of the proliferation of index-based funds and ETFs.

    See the whole interview.

    http://www.financial-planning.com/news/vanguards-bogle-index-funds-have-gone-too-far-2687554-1.html?ET=financialplanning:e15841:86235a:&st=email&utm_source=editorial&utm_medium=email&utm_campaign=fp_alert_120913

    Cletus

    Like

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