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Do SPDRs Yield Tax Advantages?

How about Trading Efficiency?

By Dr. David Edward Marcinko; MBA CMP™



The bull market generated large mutual fund capital gains distributions at the end of 2007; and maybe again for 2011. Accordingly, tax efficient mutual funds are getting more attention as a result. Also growing in popularity is Standard & Poor’s Depository Receipts (SPDRs), sponsored by and traded on the American Stock Exchange (AMEX). SPDRs are trusts that own stock positions that match a particular index, like the S&P 500. Investors then buy shares of the trust.

The Facts about SPDRs

Investors sell their shares of SPDRs on the Exchange rather than redeeming shares through the mutual fund. The trust does not sell stock to make cash redemptions. This avoids most of the capital gain distributions that annoy long-term investors. As a prospectus from the American Stock Exchange notes:

In-Kind Redemptions

While no unequivocal statement can be made as to the net tax impact on a conventional mutual fund resulting from the purchases and sales of its portfolio stocks over a period of time, conventional funds that have accumulated substantial unrealized capital gains, if they experience net redemptions and do not have sufficient available cash, may be required to make taxable capital gains distributions that are generated by changes in such fund’s portfolio. In contrast, the ‘in kind’ redemption mechanism of SPDRs may make them more tax efficient investments under most circumstances than comparable conventional mutual fund shares.

Fund Trading and AMEX Insight

The AMEX prospectus not only provides a detailed look at the in-kind redemption mechanism of the SPDRs, which is important to their tax efficiency, it also offers analysis of the economics of intraday SPDRs fund trading. Unlike mutual funds, for which prices are determined at the end of each trading day, SPDRs can be bought or sold at anytime during the day at the spot price. SPDRs trade like a stock, so the account does not need futures approval and shares can be sold short or margined. The SPDRs shares track the futures closely.


The reservation that physicians and all investors, as well as we financial advisors, have is simply “Are the SPDRs expensive to trade?” The AMEX prospectus does not answer that question in so many words, but it provides the data needed to make a cost calculation. In 1996, the bid/asked spread on the SPDRs was 1/16 or less more than 62% of the time and 1/8 or less about 95% of the time. Each investor can make his or her own commission assumptions, but the range on the S&P 500 exceeded 0.5% more than 75% of the time and was greater than 1% approximately 25% of the time. With such a narrow bid/asked spread relative to the average move in the shares and a reasonable level of commissions, it is often easy to get in or out of the fund at a price appreciably better than closing NAV.


What are these spreads today? Copies of the prospectus and other information on SPDRs are available by calling 1-800 THE AMEX


And so, your thoughts and comments on this ME-P are appreciated. Do you use SPDRs; why or why not? Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com and http://www.springerpub.com/Search/marcinko

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