Re: S&P Depository Receipts

From: Rich Carreiro <rlcarr@animato.pn.com>
Subject: Re: S&P Depository Receipts
Date: Tue, 26 Jan 1999 23:38:04 -0500

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>I am interested holding some S&P Depository Receipts (SPDRS) to avoid 
>the possible issue of an Index Fund Manager faced with net redemptions 
>and having conduct a "fire sale" of portfolio shares and thus generating 
>huge capital gain distributions.  

Keep in mind that a these worries are fear and loathing spread by
active managers and their advocates.  For example, Vanguard has
publically stated that they'd have to suffer redemptions of
over 30% of assets before any cap gain distributions will be generated
(in a declining market, the fund would sell its highest basis shares
first, generating losses that would shield gains realized if the fund was
forced to liquidate its low-basis stuff).

>With that said, I am trying to better understand the mechanics of 
>pricing SPDRs.  They seem similar to closed-end funds but they don't 
>trade with the expected premium or discount.  That suggests they are not 
>priced on supply/demand but rather directly valued to the underlying 
>asset.  They are exchange traded which suggests supply/demand pricing.  
>What am I missing?

Read the prospectus.  It states that SPDRs and a basket of SP500 stocks
in the proper proportions are freely convertible with each other (well,
for big institutions -- the creation/destruction units of SPDRs are
sizeable).  If a pricing gap ever begins to open, arbitrageurs will
quickly slam the gap shut.

Rich Carreiro
rlcarr@animato.pn.com
P5-100/RedHat Linux 4.2

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