Spiders vs. Diamonds

From Derek Deer: “Why are spiders so much more popular than diamonds? (Today’s trading volume was at over a 10 to 1 ratio). Both have similar expense fees of .18%. The long term performance of both indexes (as well as the NASDAQ) are [sic] very similar. Does it have to do with distribution of dividends?”

A.T.: Two reasons, I would guess:

First, spiders (the nickname for a “stock” with the symbol SPY that basically gives you a tiny piece of all the stocks in the Standard & Poor’s 500 index) were invented first. The folks who wanted a way to trade the equivalent of an index fund took a liking to them, got used to them, and have no particular reason to switch.

Second, the S&P is a much broader, more sensibly calculated index than the Dow (which diamonds – symbol DIA – mimic). So for those who seek true market-weighting, spiders make more sense.

(The Dow is only 30 stocks compared with 500 for the S&P, so it’s less representative of “the market.” And it is calculated without regard to logic, which makes it less representative still. To make the point, imagine a day on which 28 of the 30 Dow stocks are unchanged, but two others move up and down $3 each. A $30 stock in the Dow rises $3, which is to say 10%, and a $100 stock in the Dow falls $3, which is to say just 3%. The 10% and 3% moves are considered equal – $3 is $3 – and the Dow, in this example, closes unchanged. It becomes all the less sensible if that $30 stock happened to have 2 billion shares outstanding, meaning that it had a $60 billion market capitalization that just gained $6 billion … and the $100 stock had just 100 million shares out, giving it a $10 billion market cap that just dropped $300 million. As far as the Dow Jones Industrial Average is concerned, it was a wash: the $300 million loss and $6 billion gain are considered equivalent. This is not to say the stupidity of the way the Dow is calculated doesn’t largely cancel itself out, or that Derek is wrong: The various indices do tend to move largely in tandem. Nor is it to knock Messrs. Dow and Jones, who would have been hard-pressed, sans pocket calculators let alone computers, to calculate it differently. But still.)