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How does the SPDR exchange-traded fund work?

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Quick Answer

The Standard & Poor's depositary receipt exchange-traded fund, or SPDR ETF, invests in a variety of holdings, thus mimicking mutual funds, but trades on an exchange in a similar fashion to stocks, notes The Motley Fool. The SPDR ETF holdings are spread across the 500 companies that underpin the S&P 500 index, a prominent benchmark of the U.S. stock market. SPDR funds are sometimes referred to as spiders.

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Full Answer

The SPDR ETF tracks the S&P 500 index, although trading costs and fees introduce slight deviations from the benchmark, explains The Motley Fool. For instance, between 2010 and 2014, the S&P 500 had an average annual return of 13.66 percent, a hair above the SPDR annualized yield of 13.54 percent in the same period. The trend holds even over longer periods. Between 2005 and 2014, the fund had a mean yearly yield of 7.37 percent, a shade below the 7.46 percent annualized return that the S&P 500 index generated during the same period.

Investment firm State Street Global Advisors launched SPDR on the American Stock Exchange in 1993, explains Investopedia.

Since then, exchange-traded funds have continued to grow in popularity because they invest in diverse holdings, which minimizes risk, and yet trade in manner similar to stocks, which boosts liquidity and allows investors to take advantage of short-term price fluctuations, according to Nasdaq. Other reasons why SPDR and similar funds are so popular include tax efficiency and low expense ratios.

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