Trading the SPDR S&P 500 ETF Trust

The Standard & Poor’s (S&P) 500 Index measures the market capitalisation of the top 500 US largest corporations. Many traders and investors use the S&P 500 Index as a benchmark for the current state of the overall US economy. The SPDR S&P 500 ETF Trust (SPY) is an exchange traded fund (ETF) created to track the performance of the S&P 500 Index. It remains one of the top three most heavily traded ETFs in the second quarter of 2022 [1]. This article aims to give traders a better understanding of what the SPY ETF is and how to trade it.

What Is the SPY ETF

An ETF is a fund that owns securities like stocks, bonds, and mutual funds. The SPY ETF is one of the funds that include all the stocks in the S&P 500 Index. It was also one of the first ETFs to be introduced and listed on the US Stock Exchange Market in 1993, with the aim to replicate the S&P 500 Index.

The SPY is traded on stock exchanges, where traders can buy and sell throughout the trading day. This is one of the key differences between the SPY and the S&P 500 Index — which can only be traded at the set price point at the end of the trading day. Another key difference will be the price of a share of SPY is intended to be one-tenth that of the S&P 500 Index, which makes it more affordable for traders to trade [2]. 

How Does the SPY ETF work?

The SPY ETF includes all the stocks that are in the S&P 500 Index, so fund managers will have to monitor those specific stocks closely, particularly the ones with higher weightage. When there is a change in the S&P 500 Index, fund managers will purchase and sell the stocks to align with the S&P 500 Index. 

When traders purchase the SPY ETF, they are essentially buying a unit of the current holdings representing a small portion of each stock in the S&P 500 Index. If the stock prices within the fund increase, the SPY price will increase accordingly. When the holdings within the fund fall, the value of each share of SPY will fall as well.

The top 10 companies in the SPY ETF

The constituents of the SPY ETF include some of the highest market cap companies in the US [4]. Here are some of the leading names within the SPY ETF.

Where to trade SPY

Traders can buy shares of the SPY ETF in the same way as buying stocks at the stock exchange market. For new traders, they must first open a brokerage account and fund it. Then they can purchase the SPY through the trader’s trading website or platform. 

Why trade SPY

• SPY ETF offers excellent diversification in the US equity market, particularly in the large-cap space as it exposes traders to the top 500 US companies. This exposure also allows traders to be trading in various market sectors. Such diversification helps spreading out the risk of “putting all eggs in one basket”. For example, traders with one or few companies in their portfolio could be drastically affected if an unforeseen event happens to cause direct impact on the companies invested. Meanwhile the SPY ETF that tracks 500 different companies in various sectors will be in a much better position to withstand market volatility.
• By trading the SPY, traders are essentially investing in a fraction of all shares in the ETF. This allows traders to own part of the shares even when it is expensive. For example, $400 would barely get you one stock in Apple and Microsoft in 2022 but the same would buy you a unit of SPY ETF that indirectly invests in Apple, Microsoft and 498 other major companies in the US equity market.
• The SPY has a 0.0945% gross expense ratio [3]. The expense ratio is the fund’s total annual operating expense ratio. For instance, if an ETF generated a total annual return of 5% but charged a 2% cost fee, the expense fees would consume 40% of the fund’s gains [6].

How to trade SPY ETF

Direct Buying and Selling

One way a trader can begin trading the SPY ETF is simply entering a trade with your brokerage. This is called a market order. When a trader places a market order, it is simply buying the SPY ETF at the current market price. Traders can use various strategies to trade SPY such as dollar-cost averaging, swing trading or short selling.

Using Options 

An option is a contract that is linked to an underlying asset — in this case, it is the SPY ETF. Option trading gives traders the right to buy or sell a specific security on a specific date at a specific price. When a trader buys the SPY option, they have the right to trade it, but they’re not obligated to. If the traders decide to do so, it is called exercising their option.

For example, if a trader buys the DEC 410 SPY call, they have the right to buy that ETF for $410 at any time until the third Friday in December even though the price of SPY may have increased over the period. However, if the SPY never gets above $410 before December, the trader call will expire. This is because traders can purchase the ETF at a lower price during this time. This is how the buy call options work.

Selling call options is when the trader takes the opposite position of a call buyer. The trader would want the SPY price to go down instead. For example, a trader that sells the Dec 410 call for $2 can make $2 for every call if the ETF price never rises above $410. However, if the SPY does climb above the break-even point of $410, the trader is liable to sell the ETF at $410 to the call owner and incur the loss. 

Using Contracts for Difference (CFDs)

SPY ETF can be traded using CFDs to speculate on price movements of SPY. Using CFDs, traders can create trading opportunities in both long and short trades. In a long trade, traders purchase the SPY ETF with the intention of selling it at a higher price in the future. In a short trade, traders sell the SPY ETF before buying them in anticipation that prices will decline, allowing them to sell it another trader. It is important to note that CFDs are only a trading contract that allows traders to exchange the difference in the value of a financial product that tracks certain underlying asset without involving the actual trading of the SPY ETF unit. CFDs are complex instruments and come with high risks primarily due to leverage. You should always seek advice from qualified expert, read the terms and conditions carefully and consider truthfully whether trading CFDs and/or other financial instruments is appropriate for you in light of your experience, objectives, financial resources among other circumstances, before making a commitment to trade.

Begin trading the SPY ETF through CFDs today by opening a live accou​nt with Vantage.