Q & A : Add ‘Spiders’ to Growing Web of Investments

Want to know the true identity of Spiderman? Meet Jay Baker, a 44-year-old father of two and managing director of derivative securities at the American Stock Exchange.

OK, he’s not the “Spiderman” from the comic pages--although he says there is a passing resemblance. His moniker doesn’t just reflect the fact that he’s a collector of arachnid memorabilia--things like a Spiderman PEZ dispenser and a life-sized plastic replica of the comic book super-hero.

Baker is Wall Street’s spiderman because it’s his job.

He is in charge of the American Stock Exchange’s most successful fledgling product--Standard & Poor’s Depositary Receipts, or “spiders” for short.

Q: What are spiders?

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A: On Wall Street, “spiders” are clever little characters that spin all the stocks in the Standard & Poors 500 index into one investment pool, called the SPDR Trust. Investors who buy spiders actually buy a piece of the trust, and thus a piece of the trust’s assets, which are shares in S&P; 500 companies.

Spider shares trade just like shares of stock. Investors get dividend payments, which are “passed through” from dividend payments made by companies owned by the trust.

Q: How do spiders compare to stock index funds?

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A: In some ways, they’re nearly identical to S&P; 500 index funds, such as the Vanguard Index Trust’s 500 Portfolio. Both spiders and such index funds buy stock in S&P; 500 companies in an effort to mirror the performance of the entire index. Both index funds and spiders assess modest annual management fees--about one-fifth of 1% of assets--and deduct those fees from investor returns.

The main difference between the two is how shares are bought and sold. Shares in no-load mutual funds are traded directly through the fund company. There is no trading fee. However, when you buy, you buy at a price equal to the net asset value at the end of that day’s trading. Same deal when you sell. You can’t buy or sell during the middle of the day. Mutual funds also usually require a minimum investment of from $100 to $25,000.

With a spider, you’ll buy through a broker and pay a brokerage fee. However, you can buy or sell at any time during the day. Technically, there’s no minimum investment requirement, either. But it doesn’t make sense to buy a single spider share; your trading fees would amount to a significant portion of the purchase price.

Q: How do index funds and spiders differ from ordinary equity mutual funds?

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A: Managers of index funds and the SPDR Trust do not actively trade stocks, aiming to “beat the market.” Instead, they simply want to reflect market performance by buying shares of all the companies in a particular stock market index and hanging onto them. They’ll only buy and sell if companies drop from the index due to buyouts or bankruptcy. As a result, if you invest in either an index fund or a spider, you should expect to win when the market is up and lose when stock prices fall overall.

Managers of other equity funds, on the other hand, do aim to beat the market. They gauge their success or failure on whether the fund’s total return was higher or lower than an index.

Q: What’s so great about just reflecting an index. Isn’t it better to beat the market?

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A: There are three advantages to index funds and spiders. Specifically:

* The stock market’s broad performance--as reflected by various market indexes--is worth hitching a wagon to. Over long periods, stocks return an average of 10.3% annually. If equity fund managers could guarantee that they would beat that performance, of course, that’s preferable. But, they can’t. Sometimes they do better; sometimes worse; sometimes about the same.

This year, thanks to strong overall market performance, index funds are doing better than the vast majority of actively managed funds.

* Secondly, because the managers of index funds don’t do much managing, they don’t charge much. The average management fee for an index fund amounts to one-half of one percentage point--about one-third the average fee for an “actively managed” mutual fund. Index funds don’t have much in the way of trading costs either, since they rarely buy or sell.

* Because there’s little trading, investors rarely have to report capital gains, which are taxable. You just pay taxes on the dividend payouts.

Q: Where do spiders trade and what do they cost?

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A: Spiders trade on the American Stock Exchange, under the symbol SPY. The per-share cost usually amounts to one-tenth of the value of the S&P; 500 index, plus accrued dividends. In other words, if the S&P; index is at 550, but unpaid dividends in the SPDR Trust amount to another point on the index, a single spider share would go for about $55.10. (Technically, spider shares are shares in a unit investment trust, which means they could sell for a premium or a discount from their net asset value, Baker notes. However, since the trust is a true reflection of the index, values never deviate by much, he says. There is also a S&P; 400 spider.

By the way, brave small investors who don’t have enough money to play the index future market can use spiders to bet on index moves by borrowing on their broker’s margin account to buy or short the spider shares.

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Kathy M. Kristof welcomes your comments and suggestions for columns but regrets that she cannot respond individually to letters and phone calls. Write to Personal Finance, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or message kristof@news.latimes.com on the Internet.