Standard & Poor's depositary receipts

, or SPDRs, have become a hot property since their introduction in 1993. Each SPDR represents a share in a basket of stocks that closely tracks the

S&P 500

. Last year, the popular securities, which trade like stocks, were the most actively traded issue on the

American Stock Exchange

.

Several weeks ago, nine new select sector SPDR funds -- indexed stock portfolios that break down the S&P benchmark into its component parts -- began trading on the Amex. Market-timers who trade in and out of sectors are taking notice.

The

funds mirror nine broad sector indices that are market-cap weighted like the S&P 500. For sector players, the new funds offer an interesting alternative to sector mutual funds, and in particular,

Fidelity Investments'

popular Select funds.

Trading in and out of Fidelity's sector funds can be troublesome. The SPDRs may have what it takes to make an even better sector mousetrap, says Ed Foster, director of research at

Fabian Investment Resources

in Huntington Beach, Calif.

Fabian operates a weekly subscriber service for sector investors. Each week the firm issues a report indicating a buy, sell or hold for 30 of Fidelity's 39 Select funds. The recommendations are based on a proprietary model designed to spot price trends in the funds. In 1998, the model returned 31.4% before loads and trading charges.

"I would love to have a service based on these SPDRs," says Foster.

Fabian's interest in SPDRs is easy to understand when you break down the cost of owning and trading Fidelity's sector funds. They each carry a 3% load. On top of that you'll pay an annual expense ratio of 1% to 2.5%, depending on the fund you own. When trading between funds, you'll pay $7.50 per fund to sell funds you've held for 30 days or more. And if you sell a fund held for less than 30 days, Fidelity will charge a redemption fee of 0.75% intended to discourage short-term trading.

"You have to walk on eggshells as to when you issue a sell with these funds," says Foster. "If we were to trade every 45 days, they would not want us to trade their funds."

It's a very different story with the sector SPDRs, which are purchased through brokers at the cost of a regular trade and carry no penalty for quick turnarounds. "We encourage day-trading with these," says Jay Baker, vice president of marketing at Amex.

Expense ratios on SPDRs are 0.65%, about 10 basis points higher than the average S&P index fund's ratio, according to Lipper, but considerably lower than those of Fidelity's actively managed sector portfolios.

So far, though, Fabian Resources is watching these funds but not biting. Why?

Liquidity. While Fidelity's sector funds are priced hourly and bought and sold through Fidelity at net asset value, minus any fees, SPDRs are priced by the market, so the price is dependent on demand. A lack of trade activity could result in a bid-ask spread, or a gap between the price a buyer might be willing to pay for shares and the price a seller is willing to offer.

Until a strong market for these sector SPDRs is established, players could get burned. "I don't want to get nailed with a bid-ask spread," says Foster.

Before creating a service based on these securities, Foster says he'd like to see a minimum average daily trade volume of somewhere between 400,000 and 500,000 shares in each select SPDR. At that volume, "I know I'm really going to get the true bid-ask spread."

So far, Foster says he likes what he sees in the newborn sector SPDR market. The securities can be traded in increments of 1/64th. And spreads look good. "They've been keeping the spreads pretty tight -- at about an eighth," he says.

You can buy options on select SPDRs. And they can be shorted on the "downtick" -- that is, a fall in price -- making them useful hedging tools for those holding the underlying stocks in a falling market.

The technology SPDR, 14.1% of which is

Microsoft

(MSFT) - Get Report

, already has quite a following. It's now sporting an average daily volume of 367,000 shares. More than 1.4 million shares were traded Thursday. "It's been the most popular SPDR by far," says Amex's Baker.

The financial sector SPDR also is picking up steam. Share volume reached 356,200 Thursday. The fund's two top holdings are

American International Group

(AIG) - Get Report

and

Citigroup

(C) - Get Report

, each accounting for just over 7% of the portfolio. Interest is also building in the consumer staples SPDR fund, which lists

Merck

(MRK) - Get Report

,

Coca-Cola

(KO) - Get Report

and

Pfizer

(PFE) - Get Report

as top holdings at over 7% each. The fund enjoyed share volume of 42,500 Thursday. Far less popular so far is the industrial SPDR fund, 22.8% of which is

General Electric

(GE) - Get Report

. Just 2,500 shares traded Thursday.

In addition to watching the bid-ask spread on these securities, Fabian's group is also watching to see how closely the portfolios will track their respective indices.

Like closed-end funds, the price of sector SPDR shares can diverge from the actual net asset value of the underlying securities in the portfolio -- a situation that is being watched by arbitragers who make a business of taking advantage of such divergences.

"If they were trading at a discount, even a slight 16th discount, the arbs would buy SPDRs and then sell the stocks that make up that particular select SPDR against it to lock up a profit," says Baker.

Fabian's Foster is also keeping an eye on the sector SPDRs' total return, which includes dividends as well as price gain, minus expenses. Only time will tell how well these indexed portfolios can perform against their actively managed Fidelity Select fund competition.

As for Fidelity, the Boston-based fund giant says it's not worried about the new kids on the sector block.

The sector SPDR funds cover only broad sectors, while Fidelity offers both broad sector funds and focused industry funds within each sector, says spokeswoman Jessica Johnson.

For example, Fidelity's

(FSPTX) - Get Report

Select Technology fund invests in all types of tech industries, including PC makers and telecom equipment manufacturers. For investors looking to zero in one just one of those industries, Fidelity also offers

(FDCPX) - Get Report

Select Computers and

(FSDCX) - Get Report

Select Developing Communications.

What's more, "Fidelity Select funds are actively managed," she adds. "Our select funds have strong performances. When investors invest in a Fidelity Select fund they are really investing in our vast research capabilities."