Stocks Fools Love
February 11, 1998

S&P Depositary Receipts
by Selena Maranjian (TMF Selena)

SPDR: S&P Depositary Receipts <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: SPY)") else Response.Write("(AMEX: SPY)") end if %>
American Stock Exchange
86 Trinity Pl.
New York, NY 10006-1881
http://www.amex.com
$101 1/4 as of February 9, 1998

Truth be told, this isn't really a stock. But it's lovable nonetheless. Take a look at its historical performance and you may well find yourself smitten. $5,000 invested in SPDRs five years ago would have appreciated some 125%, growing to $11,250. That's an annualized gain of about 18%.

SPDRs are Standard & Poor's 500 Depositary Receipts and are also known as "Spiders." Just like S&P 500 Index funds, they represent a bundle of stocks. Not just any 500, either -- the 500 contained in the S&P 500 are among the biggest and brightest of America's corporations. But unlike an index fund, which is a mutual fund, SPDRs are structured like shares of stock and valued at 1/10th of the value of the S&P 500 index. You can buy and sell as little as one share at a time. A share is equal to roughly $100.

I won't spend much time on a detailed description of SPDRs, as a lot has already been written about them in Fooldom. At the end of 1997, the Fool Portfolio issued an informative buy report on SPDRs and bought some shares. Just a few weeks ago, Randy Befumo discussed and explained SPDRs in a Fool on the Hill. (He also addressed the concept of index funds on 1/8/98 and 1/9/98.) Indeed, the S&P 500 Index Fund is even featured as one of the 13 Steps to Investing Foolishly.

So... what makes these spiders so lovable? Well, they won't crawl onto you and bite you, for one thing. But much more important than that, they:

-- Offer instant diversification.

-- Trounce the performance of most mutual funds.

-- Are easy to get into and out of.

-- Are structured to mimic a long-term annual average return of 10-11%.

-- Offer investors a chance to participate in the growth of the market as a whole.

(Geez... this isn't the most lively and fun report so far, is it? Let me digress, then, to point out that one of the definitions of the word "spider" is "a cast-iron frying pan." Really. I could also go on about how most arachnids have unsegmented abdomens and how spiders digest their food outside their bodies (really), but I'm here to be of some use, not to gross you out. So let's continue.)

SPDRs are well suited for the following kinds of investors:

-- If you're new to investing and not yet ready to plunk your pesos into any particular individual stocks, you can invest in some SPDRs while you get up to speed. Since SPDRs mimic the market as a whole, their long-term historic return is likely to be in the neighborhood of an average 10-11% per year. That's how the market has fared on average over many decades.

-- If you don't yet have much money to invest, you could invest in SPDRs while you accumulate more cash. Through a discount broker that offers commission rates below $10, for example, you could invest $500 or so at a time without sacrificing too high a percentage of your money to the commission. This would allow you to accumulate several thousand dollars over time, enough to eventually spread among several different stocks. (You don't ever want to have all your money in just one or two stocks, but if it's all in SPDRs, it's really in 500 stocks at once. Instant diversification!)

-- If you're not yet convinced that you can do better investing in individual stocks than in mutual funds, then perhaps you should invest in SPDRs instead. (Consider this factoid: According to Lipper Analytical Services, from 1993 through 1997 only 11% of general equity mutual funds outperformed the S&P 500. That's right -- 89% didn't fare as well as SPDRs. How did your fund(s) do?)

-- If you have some cash sitting in your portfolio, you might invest in SPDRs until you figure out where to put the cash. This was the reason the Fool Port bought some.

Are there risks? Yup, you betcha. The market has been advancing relentlessly lately, with the S&P 500 crossing the 1,000-point line for the first time in history just this month. One of these years, we'll see a less-than-stellar performance. But in the long run, the market's direction has been clearly upward.

If you're an indecisive sort, and can't determine which stock you love most, pledging your heart to SPDRs will permit you to love 500 stocks at once. Not a bad deal at all.

Next Stock Fools Love: U.S.A. Floral Products

* A Stock to Love represents the opinion of one Fool and in no way should be taken as the opinion of either the Motley Fool, Inc., the company in question or representative of anyone or anything else other than that specific Fool's thoughts.