SPX vs. SPY | What is the Difference?
If you are confused about SPX vs. SPY, this article will cover everything you need to know about trading the two.
Key Takeaways
The SPX (S&P 500 Index) and SPY (SPDR S&P 500 ETF) are two popular financial instruments used by investors to gain exposure to the performance of the S&P 500 Index, which is a benchmark for the overall performance of the U.S. stock market.
The SPX is an index that tracks the performance of the 500 largest companies in the U.S., and is often used as a gauge of the overall health of the U.S. economy.
The SPY is an exchange-traded fund (ETF) that tracks the performance of the S&P 500 Index, and can be bought and sold like a stock.
SPX vs. SPY | Key Differences
The SPX is the S&P 500 index based on basis points. You cannot buy shares of the SPX index directly. Instead, you can only trade options on the SPX.
The SPY is an S&P 500 ETF that tracks the performance of the SPX index. You can buy and hold shares of SPY for a long-term investment and trade options.
The SPX is 10x the size of the SPY. Therefore, one SPX options contract is worth 10 SPY contracts, allowing you to save on commissions.
SPX vs. SPY Tax Treatment
SPX options benefit from the 1256 tax rule, which states 60% of profits are taxed at long-term rates while 40% is taxed at short-term rates.
The SPY equity and options are taxed the same as any other stock; therefore, any option profits held for less than one year are taxed at the short-term capital gains rate.
If you buy SPY shares and sell them for a profit after a year or longer, it will all be taxed at the long-term capital gains rate.
SPX vs. SPY Settlement Differences
SPX and SPY options settle differently since the SPX options are European style and the SPY options are American.
European Style Options
European style options are cash settled and cannot be exercised early. Cash settled options pay out cash rather than equity upon assignment since you cannot own shares of the SPX.
American Style Options
American style options can be exercised anytime and pay out shares upon assignment.
SPX vs. SPY Dividends
Does SPY Pay a Dividend?
Yes, the SPY ETF pays dividends and is an excellent long-term investment for general market allocation.
Does SPX Pay a Dividend?
Since you cannot directly purchase shares of the SPX index, it does not pay a dividend.
What is an Index ETF?
An index ETF seeks to track the performance of an underlying index. The S&P 500 is the most popular index with various ETFs you can buy, such as the SPY.
There are also dividend ETFs, growth ETFs, financial ETFs, and many others.
How to Learn More About the Stock Market
If you want to learn more about the stock market, joining a community of like-minded individuals is a great way to accelerate your learning curve.
Benefits of Joining a Trading Community
Converse with thousands of other experienced traders
When you join a community, you can talk with other traders with unique viewpoints on the stock market.
Learn new strategies
There are a million ways to trade on the stock market, and you will surely learn new strategies when you talk with other traders.
Stay up to date on the latest stock market news
Additionally, trading communities will keep you updated on the latest economic news. You can also ask questions if you don’t understand some of the complex financial terms.
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