S&P 500 Index - "Spiders"?

Question

my broker is recommending me to put money into this. is this a good investment?
http://www.google.com/finance?q=SPY

would it be better to go with a managed fund?
thx

Answer 1

If you are looking for pure return per unit of risk, Spiders might be a good investment. It is a cheap way to get a well diversified portfolio. Mutual funds have larger fees, so unless the fund consistently beats a risk-adjusted index, you are better off with the spider.

One of my B-School professors did a study where he computed the beta of a large number of mutual funds. He then set up a dummy portfolio made of cash and S&P futures that would have the same market risk as the fund. He then compared the returns on the mutual funds to the returns on the portfolios of cash and futures. The cash and futures almost always beat the mutual funds.

Interestingly, his take-away was not that we should invest in something like Spiders -- but rather that we should go into the business of running mutual funds. The fees explain the difference.

That being said, there is one thing you ought to consider before making an investment. Look to see how taxes are handled (for the funds and the Spiders). This isn't an issue if you are doing this in your IRA -- but if you have to pay taxes, look into this first.

Answer 2

"SPY" is an ETF (electronically traded fund) which is nearly identical to owning shares of an S&P 500 index mutual fund, except that an ETF is traded like a stock. It is considered a very reasonable investment which will obviously match the performance of the S&P 500 (less fees). SPY was one of the first ETF's introduced but there are now a variety of ETF's available.

An index fund matches the performance of a index through passive ownership. A managed fund attempts to beat the indexes through active trading and shifting allocations. Judging from historical evidence it would seem that managed funds rarely beat indexes for sustained periods, although managed funds are also hampered by their higher fees.

Answer 3

Historically,few managers have beaten the SP 500 yet have charged a higher rate and you have to pay internal taxes (you won't see the taxes, but they will hurt your growth) on managed funds. Not only can you get the Sp 500 through SPY, but you can break up the sectors. For instance,XLU is the utility companies in the SP 500 and XLI is the industry companies in the SP 500.