UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-08837
----------------------------------------------
SELECT SECTOR SPDR(R) TRUST
------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
225 Franklin Street, Boston, Massachusetts 02110
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(Address of principal executive offices)(Zip code)
(Name and Address of Agent for Service) Copy to:
Scott M. Zoltowski, Esq. Stuart Strauss, Esq.
State Street Bank and Trust Company Clifford Chance US LLP
One Federal Street 31 West 52nd Street
Boston, MA 02110 New York, New York 10019
Registrant's telephone number, including area code: (303) 623-2577
Date of fiscal year end: September 30
Date of reporting period: September 30, 2004
Item 1: Reports to Shareholders
THE SELECT SECTOR SPDR TRUST
[IMAGE]
ANNUAL REPORT
SEPTEMBER 30, 2004
SELECT SECTOR
SPDRs(R)
Benchmark Sector-Based Equity Portfolios of Companies in the S&P 500(R)
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
SELECT SECTOR SPDR FUNDS
Select Sector SPDR Funds are unique investments that unbundle the benchmark S&P
500 and give you ownership in particular sectors or groups of industries that
are represented by a specified Select Sector Index. Through a single share,
investors can buy or sell any of nine major industry sectors that make up the
S&P 500 much as they buy or sell a share of stock. Select Sector SPDR Fund
shares are different from the shares of conventional mutual funds. Select Sector
SPDRs trade on the American Stock Exchange.
NINE SELECT SECTOR SPDR FUNDS
Shares are available for exchange trading in the following Funds of the Select
Sector SPDR Trust:
<Table>
THE CONSUMER DISCRETIONARY SELECT SECTOR SPDR FUND XLY
THE CONSUMER STAPLES SELECT SECTOR SPDR FUND XLP
THE ENERGY SELECT SECTOR SPDR FUND XLE
THE FINANCIAL SELECT SECTOR SPDR FUND XLF
THE HEALTH CARE SECTOR SPDR FUND XLV
THE INDUSTRIAL SELECT SECTOR SPDR FUND XLI
THE MATERIALS SELECT SECTOR SPDR FUND XLB
THE TECHNOLOGY SELECT SECTOR SPDR FUND XLK
THE UTILITIES SELECT SECTOR SPDR FUND XLU
</Table>
Each of these Funds is designed to, before expenses, closely track the price
performance and dividend yield of a Select Sector Index. Each Fund's portfolio
is comprised principally of shares of constituent companies in the S&P 500. Each
stock in the S&P 500 is allocated to only one Select Sector Index. The combined
companies of the nine Select Sector Indexes represent all of the companies in
the S&P 500. Of course, each Select Sector SPDR Fund can be expected to move up
or down in value with its underlying Select Sector Index.
OBJECTIVE
Select Sector SPDR Funds are designed to provide investors with an affordable
way to invest in a portfolio of equity securities in a sector or group of
industries in a single trade. Select Sector SPDR Funds allow you to custom
tailor asset allocations to fit your particular investment needs or goals. One
Fund may complement another; individual Select Sector SPDR Funds can be used to
increase exposure to certain industries that may be outperforming the market or
to hedge other holdings in your portfolio. Although an individual Select Sector
SPDR Fund may bear a higher level of risk than a broad-market fund, because of
less diversity, sector investments may also offer opportunities for returns
greater than an investment in the entire S&P 500 Index.
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
PRESIDENT'S LETTER TO SHAREHOLDERS
DEAR SHAREHOLDERS:
Enclosed is the report for The Select Sector SPDR Trust for the period ending
September 30, 2004, together with Management's Discussion and Analysis for each
of the Select Sector SPDR Funds and their respective indices.
The S&P 500 gained 13.87% in the fiscal year ending September 30, 2004. Most of
the gain was achieved in the first quarter of the fiscal year when the index
rose 12.18%. Since then, the index has traded in a relatively tight range,
usually within plus or minus 2 percentage points of the level at the end of the
2003 calendar year.
After pricing significant expected earnings into stock prices early in the year,
the market appeared to wait and see if those earnings materialized. Other
factors influencing the market were the presidential election, the continuing
instability in Iraq, rising short term interest rates, and increasing oil
prices. The price of a barrel of oil was just under $50 on September 30, 2004, a
70% increase from the price a year earlier. The impact of this price increase
along with the Fed's decision to tighten monetary policy by raising short term
rates caused some concern over the outlook of the U.S. economy.
While all nine sector indices posted gains during the last fiscal year, Energy
was the top performing Select Sector, rising nearly 49%. The increased price of
oil appeared to benefit the companies in this index. The Materials (+29%) and
Industrials (+24%) indexes also posted strong gains during the year. Materials
benefited from increased commodity prices and Industrials appeared to gain on
the improved economic outlook at the beginning of the period. Six of the nine
Select Sector Indices posted double digit gains during the fiscal year.
Healthcare (+5%) and Technology (+6%) were the weakest performers in a strong
market. The Management Discussion and Analysis of each fund that follows
provides additional detail about each Select Sector.
We appreciate your support of The Select Sector SPDR Trust and look forward to
serving your investment needs in the future.
Sincerely,
/s/ Donald A. Gignac
Donald A. Gignac
President
The Select Sector SPDR Trust
1
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE CONSUMER DISCRETIONARY SELECT SECTOR SPDR FUND
The Consumer Discretionary Select Sector SPDR Fund ("Fund") seeks to replicate
the total return of the Consumer Discretionary Select Sector of the S&P 500
Index. To accomplish this objective, the Fund utilizes a "passive" or indexing
investment approach and attempts to approximate the investment performance of
its benchmark Select Sector Index, before expenses, by investing in a portfolio
of stocks that seek to replicate the Consumer Discretionary Select Sector Index.
For the twelve-month period ending September 30, 2004, the Fund returned 13.83%
as compared to the Consumer Discretionary Select Sector Index return of 14.15%
and the total S&P 500 Index return of 13.87%.
The Consumer Discretionary Sector performed largely in line with the overall S&P
500 Index over the past twelve months, posting most of its gains in the last
quarter of 2003. There had been a recovery in leisure travel over the period,
and stocks such as Carnival Corp., Starwood Hotels & Resorts Worldwide, Inc.,
and Harrah's Entertainment, Inc., benefited nicely as a result. Restaurant
companies also enjoyed solid returns in this environment. Starbucks Corp., Yum
Brands, Inc. and Darden Restaurants, Inc., all experienced increases in
same-store sales, while also opening new stores both domestically and
internationally. The housing industry continued to fare well, with significant
numbers of new construction and renovation projects being undertaken. Pulte
Homes, Inc., KB HOME and Home Depot, Inc. led the way in this group.
Lower-end, multi-line discount stores such as Family Dollar Stores, Inc., Big
Lots, Inc., and Kohl's Corp., were hurt as consumers appeared to continue to
bypass the lower-end retailers in favor of more specialty, higher-end retail
shops. Media companies such as Clear Channel Communications, Inc. and Viacom,
Inc. also weighed on the sector's return as a multi-year advertising slump
continued to affect revenues, and competition from satellite radio started to
pick up steam. Newspaper companies were also impacted by decreasing advertising
revenues, with Dow Jones & Co., Inc., Tribune Co., and New York Times Co., all
off for the period.
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT AT NET ASSET VALUE
CONSUMER DISCRETIONARY SELECT SECTOR SPDR FUND
[LINE GRAPH]
<Table>
<Caption>
CONSUMER DISCRETIONARY SELECT
SECTOR SPDR FUND S&P 500 INDEX
----------------------------- -------------
12/16/98 10000.00 10000.00
12/31/98 10705.00 10584.00
03/31/99 11652.00 11111.00
06/30/99 12145.00 11895.00
09/30/99 10717.00 11152.00
12/31/99 12675.00 12811.00
03/31/00 11973.00 13104.00
06/30/00 10611.00 12756.00
09/30/00 10275.00 12631.00
12/31/00 10575.00 11644.00
03/31/01 10807.00 10264.00
06/30/01 11440.00 10864.00
09/30/01 9613.00 9269.00
12/31/01 11988.00 10260.00
03/31/02 12520.00 10288.00
06/30/02 11504.00 8909.00
09/30/02 9523.00 7370.00
12/31/02 9717.00 7992.00
03/31/03 9576.00 7740.00
06/30/03 11394.00 8931.00
09/30/03 11642.00 9168.00
12/31/03 13310.00 10284.00
03/31/04 13463.00 10458.00
06/30/04 13417.00 10638.00
09/30/04 13252.00 10439.00
</Table>
2
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Past performance is not indicative of future results.)
PERFORMANCE AS OF SEPTEMBER 30, 2004
<Table>
<Caption>
---------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN
-------------------------------------------------------
CONSUMER
NET ASSET MARKET DISCRETIONARY
VALUE VALUE SELECT SECTOR INDEX
---------------------------------------------------------------------------------
ONE YEAR ENDED 9/30/04 13.83% 13.90% 14.15%
---------------------------------------------------------------------------------
THREE YEARS ENDED 37.89% 38.48% 39.08%
9/30/04
---------------------------------------------------------------------------------
FIVE YEARS ENDED 23.67% 24.02% 25.79%
9/30/04
---------------------------------------------------------------------------------
SINCE INCEPTION(1) 28.24% 27.47% 34.98%
---------------------------------------------------------------------------------
<Caption>
------------------------- ------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
----------------------------------------------
CONSUMER
NET ASSET MARKET DISCRETIONARY
VALUE VALUE SELECT SECTOR INDEX
---------------------------------------------------------------------------------
ONE YEAR ENDED 9/30/04 13.83% 13.90% 14.15%
---------------------------------------------------------------------------------
THREE YEARS ENDED 11.30% 11.46% 11.62%
9/30/04
---------------------------------------------------------------------------------
FIVE YEARS ENDED 4.34% 4.40% 4.70%
9/30/04
---------------------------------------------------------------------------------
SINCE INCEPTION(1) 4.40% 4.29% 5.33%
---------------------------------------------------------------------------------
</Table>
(1) Total returns are calculated based on the commencement of trading on the
AMEX, December 22, 1998.
(Average annual returns reflect past performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost. Past
performance is not indicative of future results.)
TOP FIVE HOLDINGS AS OF SEPTEMBER 30, 2004
<Table>
--------------------------------------------------------------------------------------------------------------
DESCRIPTION HOME DEPOT, TIME COMCAST eBAY, VIACOM
INC. WARNER, CORP. INC. INC.
INC.
--------------------------------------------------------------------------------------------------------------
SHARES 485,188 1,010,637 494,078 146,127 383,484
--------------------------------------------------------------------------------------------------------------
MARKET VALUE $19,019,370 16,311,681 13,952,763 13,434,917 12,869,723
--------------------------------------------------------------------------------------------------------------
% OF 7.48 6.41 5.48 5.28 5.06
NET ASSETS
--------------------------------------------------------------------------------------------------------------
</Table>
(The five largest holdings are subject to change, and there are no guarantees
the Fund will continue to remain invested in any particular company.)
INDUSTRY BREAKDOWN AS OF SEPTEMBER 30, 2004*
[PIE CHART]
<Table>
Auto Components 2
Automobiles 5.8
Distributors 0.6
Hotels Restaurants & Leisure 13
Household Durables 4.9
Internet & Catalog Retail 5.3
Leisure Equipment & Products 2.1
Media 30.9
Multi-Line Retail 9.7
Specialty Retail 21.8
Textiles, Apparel & Luxury Goods 3.9
</Table>
* The Fund's industry breakdown is expressed as a percentage of net assets
and may change over time.
3
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
CLOSING PRICE VS. NAV AS OF SEPTEMBER 30, 2004
<Table>
<Caption>
-----------------------------------------------------------------------------------------------------------------------------
CLOSING PRICE ABOVE NAV CLOSING PRICE BELOW NAV
----------------------------------------------------------------------------------------
50-99 100-199 >200 50-99 100-199 >200
BASIS BASIS BASIS BASIS BASIS BASIS
POINTS POINTS POINTS POINTS POINTS POINTS
----------------------------------------------------------------------------------------
2004
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/04 0 0 0 0 0 0
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/04 0 0 0 0 0 0
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/04 0 0 0 0 0 0
-----------------------------------------------------------------------------------------------------------------------------
2003
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/03 1 0 0 0 0 0
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/03 1 0 0 0 0 0
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/03 0 0 0 0 0 0
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/03 0 0 0 2 0 0
-----------------------------------------------------------------------------------------------------------------------------
2002
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/02 1 0 0 3 0 0
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/02 2 0 0 2 0 0
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/02 0 0 0 0 0 0
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/02 0 0 0 2 0 0
-----------------------------------------------------------------------------------------------------------------------------
2001
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/01 1 0 0 7 0 1
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/01 0 0 0 2 0 0
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/01 1 0 0 4 1 0
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/01 1 0 0 2 0 0
-----------------------------------------------------------------------------------------------------------------------------
2000
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/00 4 1 0 4 0 0
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/00 5 0 0 3 1 0
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/00 7 2 0 3 0 0
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/00 4 0 0 6 1 0
-----------------------------------------------------------------------------------------------------------------------------
</Table>
4
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE CONSUMER STAPLES SELECT SECTOR SPDR FUND
The Consumer Staples Select Sector SPDR Fund ("Fund") seeks to replicate the
total return of the Consumer Staples Select Sector of the S&P 500 Index. To
accomplish this objective, the Fund utilizes a "passive" or indexing investment
approach and attempts to approximate the investment performance of its benchmark
Select Sector Index, before expenses, by investing in a portfolio of stocks that
seek to replicate the Consumer Staples Select Sector Index. For the twelve-month
period ending September 30, 2004, the Fund returned 8.38% as compared to the
Consumer Staples Select Sector Index return of 8.66% and the total S&P 500 Index
return of 13.87%.
Despite lagging the broader S&P 500 Index over the past twelve months, the
Consumer Staples Select Sector did include a number of industries with strong
results. Companies within the food products industry provided a lift for the
sector, with their emphasis on higher margin products and cost-containment
strategies. Kellogg Co., Hershey Foods Corp., Sara Lee Corp. and McCormick &
Co., Inc. led the way and together contributed to the return of the Consumer
Staples Select Sector Index. Diversified household products manufacturers such
as Kimberly-Clark Corp. and Procter & Gamble Co. also enjoyed a strong twelve
months, as the results of restructurings and higher sales more than offset
general increases in the costs of raw materials.
Food and staples retailers were the largest drag on the performance of the
Index, with Winn-Dixie Stores, Inc., Safeway, Inc., and Kroger Co. hit the
hardest. A prolonged labor strike in Southern California and an expensive
promotional push to gain back customers took its toll on Safeway and Kroger,
while Winn-Dixie was undergoing a major restructuring with mixed results to
date. All food retailers face a serious threat from lower-cost discounters such
as Wal-Mart Stores, Inc. Wal-Mart ended the period down, with rising gas prices
frequently quoted as significantly affecting the discretionary spending power of
the retailer's core customers.
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT AT NET ASSET VALUE
CONSUMER STAPLES SELECT SECTOR SPDR FUND
[LINE GRAPH]
<Table>
Consumer Staples Select Sector SPDR Fund
12/16/98 10000
10451
03/31/99 10193
9890
09/30/99 8755
8916
03/31/00 8228
9875
09/30/00 9797
11212
03/31/01 9798
9644
09/30/01 9945
10098
03/31/02 10390
8922
09/30/02 7989
8083
03/31/03 7554
8228
09/30/03 8331
8966
03/31/04 9448
9570
09/30/04 9028
S&P 500 Index
12/16/98 10000
10584
03/31/99 11111
11895
09/30/99 11152
12811
03/31/00 13104
12756
09/30/00 12631
11644
03/31/01 10264
10864
09/30/01 9269
10260
03/31/02 10288
8909
09/30/02 7370
7992
03/31/03 7740
8931
09/30/03 9168
10284
03/31/04 10458
10638
09/30/04 10439
</Table>
(Past performance is not indicative of future results.)
5
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
PERFORMANCE AS OF SEPTEMBER 30, 2004
<Table>
<Caption>
-------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AVERAGE ANNUAL TOTAL RETURN
-----------------------------------------------------------------------------------------------------
NET ASSET MARKET CONSUMER STAPLES NET ASSET MARKET CONSUMER STAPLES
VALUE VALUE SELECT SECTOR INDEX VALUE VALUE SELECT SECTOR INDEX
-------------------------------------------------------------------------------------------------------------------------------
ONE YEAR ENDED 9/30/04 8.38% 8.30% 8.66% 8.38% 8.30% 8.66%
-------------------------------------------------------------------------------------------------------------------------------
THREE YEARS ENDED -9.20% -9.05% -8.55% -3.17% -3.11% -2.94%
9/30/04
-------------------------------------------------------------------------------------------------------------------------------
FIVE YEARS ENDED 3.16% 2.61% 4.50% 0.62% 0.52% 0.88%
9/30/04
-------------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION(1) -11.06% -11.19% -8.45% -2.01% -2.03% -1.52%
-------------------------------------------------------------------------------------------------------------------------------
<Caption>
------------------------- -------
------------------------------------------
ONE YEAR ENDED 9/30/04
--------------------------------------------------
THREE YEARS ENDED
9/30/04
----------------------------------------------------------
FIVE YEARS ENDED
9/30/04
------------------------------------------------------------------
SINCE INCEPTION(1)
--------------------------------------------------------------------------
</Table>
(1) Total returns are calculated based on the commencement of trading on the
AMEX, December 22, 1998.
(Average annual returns reflect past performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost. Past
performance is not indicative of future results.)
TOP FIVE HOLDINGS AS OF SEPTEMBER 30, 2004
<Table>
---------------------------------------------------------------------------------------------------------------------
DESCRIPTION WAL-MART STORES, PROCTER & GAMBLE COCA-COLA PEPSICO, ALTRIA
INC. CO. CO. (THE) INC. GROUP,
INC.
---------------------------------------------------------------------------------------------------------------------
SHARES 2,329,763 1,396,038 1,332,594 572,043 551,388
---------------------------------------------------------------------------------------------------------------------
MARKET VALUE $123,943,392 75,553,576 53,370,389 27,829,892 25,937,291
---------------------------------------------------------------------------------------------------------------------
% OF 20.08 12.24 8.65 4.51 4.20
NET ASSETS
---------------------------------------------------------------------------------------------------------------------
</Table>
(The five largest holdings are subject to change, and there are no guarantees
the Fund will continue to remain invested in any particular company.)
INDUSTRY BREAKDOWN AS OF SEPTEMBER 30, 2004*
(PIE CHART)
<Table>
Beverages 20
Food & Drug Retailing 33.3
Food Products 14.3
Household Products 19
Other Assets 0.2
Personal Products 6.7
Tobacco 6.5
</Table>
* The Fund's industry breakdown is expressed as a percentage of net assets
and may change over time.
6
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
CLOSING PRICE VS. NAV AS OF SEPTEMBER 30, 2004
<Table>
<Caption>
-----------------------------------------------------------------------------------------------------------------------------
CLOSING PRICE ABOVE NAV CLOSING PRICE BELOW NAV
-----------------------------------------------------------------------------------------------
50-99 100-199 >200 50-99 100-199 >200
BASIS BASIS BASIS BASIS BASIS BASIS
POINTS POINTS POINTS POINTS POINTS POINTS
-----------------------------------------------------------------------------------------------
2004
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/04 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/04 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/04 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
2003
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/03 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/03 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/03 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/03 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
2002
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/02 2 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/02 1 0 0 3 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/02 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/02 1 0 0 3 0 0
------------------------------------------------------------------------------------------------------------------------------
2001
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/01 2 0 0 9 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/01 4 0 0 7 1 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/01 1 0 0 2 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/01 1 0 0 5 0 0
------------------------------------------------------------------------------------------------------------------------------
2000
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/00 2 0 0 2 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/00 3 0 0 1 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/00 7 0 0 9 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/00 9 1 0 6 0 0
------------------------------------------------------------------------------------------------------------------------------
</Table>
7
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE ENERGY SELECT SECTOR SPDR FUND
The Energy Select Sector SPDR Fund ("Fund") seeks to replicate the total return
of the Energy Select Sector Index of the S&P 500 Index. To accomplish this
objective, the Fund utilizes a "passive" or indexing investment approach and
attempts to approximate the investment performance of its benchmark Select
Sector Index, before expenses, by investing in a portfolio of stocks that seek
to replicate the relevant Select Sector Index. For the twelve-month period
ending September 30, 2004, the Fund had a return of 48.27% as compared to the
Energy Select Sector Index return of 48.91% and the S&P 500 Index return of
13.87%.
During the twelve-month period ended September 30, 2004, the Energy Sector
dramatically outperformed the broader S&P 500 Index by 35 percentage points. In
fact, the Energy Sector experienced the largest return among all sectors but
ranked as the third largest contributing sector of the S&P 500 Index due to its
relatively small weight of about 7%. More specifically, the Energy Sector, which
outperformed the S&P 500 in eight of the last twelve months, experienced most of
its gains during December 2003, February 2004, June 2004 and September 2004.
ChevronTexaco Corp, the second largest company in the Energy Sector Index, had
the largest contribution to the Fund's return. Chevron was followed closely by
Exxon Mobil Corp., the largest company in the Energy Sector Index. Both
companies enjoyed the impact of continued high oil and gas prices during a peak
demand period. Additionally, there has been a steady increase in positive news
surrounding drilling activity that helped the overall industry. In fact, all
stocks in the Energy Sector Index ended the year in September 2004 with positive
returns, with Rowan Cos., Inc., the only index member that did not post a double
digit gain.
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT AT NET ASSET VALUE
ENERGY SELECT SECTOR SPDR FUND
[LINE GRAPH]
<Table>
<Caption>
ENERGY SELECT SECTOR SPDR FUND S&P 500 INDEX
------------------------------ -------------
12/16/98 10000.00 10000.00
9835.00 10584.00
03/31/99 10483.00 11111.00
11993.00 11895.00
09/30/99 11791.00 11152.00
11707.00 12811.00
03/31/00 12672.00 13104.00
13098.00 12756.00
09/30/00 14314.00 12631.00
14558.00 11644.00
03/31/01 13514.00 10264.00
13419.00 10864.00
09/30/01 11482.00 9269.00
11885.00 10260.00
03/31/02 12913.00 10288.00
11780.00 8909.00
09/30/02 9561.00 7370.00
10138.00 7992.00
03/31/03 10207.00 7740.00
11041.00 8931.00
09/30/03 11078.00 9168.00
12811.00 10284.00
03/31/04 13663.00 10458.00
14727.00 10638.00
09/30/04 16426.00 10439.00
</Table>
8
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Past performance is not indicative of future results.)
PERFORMANCE AS OF SEPTEMBER 30, 2004
<Table>
<Caption>
------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AVERAGE ANNUAL TOTAL RETURN
----------------------------------------------------------------------------------------------------
NET ASSET MARKET ENERGY NET ASSET MARKET ENERGY
VALUE VALUE SELECT SECTOR INDEX VALUE VALUE SELECT SECTOR INDEX
------------------------------------------------------------------------------------------------------------------------------
ONE YEAR ENDED 9/30/04 48.27% 47.60% 48.91% 48.27% 47.60% 48.91%
------------------------------------------------------------------------------------------------------------------------------
THREE YEARS ENDED 43.07% 43.16% 44.38% 12.68% 12.70% 13.02%
9/30/04
------------------------------------------------------------------------------------------------------------------------------
FIVE YEARS ENDED 39.28% 39.08% 41.88% 6.85% 6.82% 7.25%
9/30/04
------------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION(1) 66.82% 66.18% 67.41% 9.27% 9.20% 9.34%
------------------------------------------------------------------------------------------------------------------------------
<Caption>
------------------------- -------
------------------------------------------
ONE YEAR ENDED 9/30/04
--------------------------------------------------
THREE YEARS ENDED
9/30/04
----------------------------------------------------------
FIVE YEARS ENDED
9/30/04
------------------------------------------------------------------
SINCE INCEPTION(1)
--------------------------------------------------------------------------
</Table>
(1) Total returns are calculated based on the commencement of trading on the
AMEX, December 22, 1998.
(Average annual returns reflect past performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost. Past
performance is not indicative of future results.)
TOP FIVE HOLDINGS AS OF SEPTEMBER 30, 2004
<Table>
-----------------------------------------------------------------------------------------------------------------------------
DESCRIPTION EXXON MOBIL CHEVRON TEXACO CONOCO PHILLIPS SCHLUMBERGER OCCIDENTAL PETROLEUM
CORP. CORP. INC. LTD. CORP.
-----------------------------------------------------------------------------------------------------------------------------
SHARES 6,314,031 4,216,424 1,444,624 846,265 1,011,843
-----------------------------------------------------------------------------------------------------------------------------
MARKET VALUE $305,157,118 226,168,983 119,687,099 56,962,097 56,592,379
-----------------------------------------------------------------------------------------------------------------------------
% OF 20.85 15.46 8.18 3.89 3.87
NET ASSETS
-----------------------------------------------------------------------------------------------------------------------------
</Table>
(The five largest holdings are subject to change, and there are no guarantees
the Fund will continue to remain invested in any particular company.)
INDUSTRY BREAKDOWN AS OF SEPTEMBER 30, 2004*
[PIE CHART]
<Table>
Energy Equipment & Services 19.3
Oil and Gas Services 80.6
Other Assets 0.1
</Table>
* The Fund's industry breakdown is expressed as a percentage of net assets
and may change over time.
9
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
CLOSING PRICE VS. NAV AS OF SEPTEMBER 30, 2004
<Table>
<Caption>
-----------------------------------------------------------------------------------------------------------------------------
CLOSING PRICE ABOVE NAV CLOSING PRICE BELOW NAV
-----------------------------------------------------------------------------------------------
50-99 100-199 >200 50-99 100-199 >200
BASIS BASIS BASIS BASIS BASIS BASIS
POINTS POINTS POINTS POINTS POINTS POINTS
-----------------------------------------------------------------------------------------------
2004
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/04 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/04 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/04 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
2003
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/03 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/03 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/03 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/03 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
2002
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/02 1 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/02 1 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/02 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/02 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
2001
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/01 0 0 0 4 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/01 3 1 0 1 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/01 1 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/01 0 0 0 3 0 0
------------------------------------------------------------------------------------------------------------------------------
2000
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/00 2 0 0 1 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/00 0 0 0 2 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/00 4 0 0 5 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/00 5 1 0 4 0 0
------------------------------------------------------------------------------------------------------------------------------
</Table>
10
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE FINANCIAL SELECT SECTOR SPDR FUND
The Financial Select Sector SPDR Fund ("Fund") seeks to replicate the total
return of the Financial Select Sector of the S&P 500 Index. To accomplish this
objective, the Fund utilizes a "passive" or indexing investment approach and
attempts to approximate the investment performance of its benchmark Select
Sector Index, before expenses, by investing in a portfolio of stocks that seek
to replicate the relevant Select Sector Index. For the twelve-month period
ending September 30, 2004, the Fund had a return of 14.62% as compared to the
Select Sector Index return of 14.89% and the total S&P 500 Index return of
13.87%.
The best performing stock for the period was Countrywide Financial Corp.
Countrywide is primarily involved in the residential mortgage business,
including loan origination and the sale and servicing of loan agreements. Low
mortgage rates continued to fuel the housing market, providing Countrywide with
strong revenue and earnings growth. Other notable names included Providian
Financial Corp and South Trust Corp. Providian Financial Corp's profit surged as
a result of a decrease in bad loans. Providian had also been undergoing cost
cutting measures along with efforts to improve its customer credit profile.
South Trust agreed to be acquired by Wachovia Corp. in a stock deal valued at
$14.3 billion.
The worst performer for the period was Janus Capital Group, Inc. Janus recently
settled regulatory reviews of mutual fund improper trading and as a result
suffered increased shareholder redemptions in the Janus Funds. Poor performance
had been the main reason investors have pulled nearly $3.5 billion from the
mutual fund company in the first six months of 2004. Additional detractors
included Charles Schwab Corp. and Fifth Third Bancorp. Charles Schwab, the
biggest US discount brokerage, fired CEO David Pottruck in July 2004 and
replaced him with founder and former CEO, Charles Schwab. Schwab had struggled
to find its niche between the full service brokers like Merrill Lynch and the
low cost rivals like Ameritrade and E-trade. Fifth Third Bancorp recently
completed the acquisition of First National Bancshares of Florida.
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT AT NET ASSET VALUE
FINANCIAL SELECT SECTOR SPDR FUND
[LINE GRAPH]
<Table>
<Caption>
FINANCIAL SELECT SECTOR SPDR
FUND S&P 500 INDEX
---------------------------- -------------
12/16/98 10000.00 10000.00
10597.00 10584.00
03/31/99 11371.00 11111.00
11925.00 11895.00
09/30/99 10097.00 11152.00
10956.00 12811.00
03/31/00 11195.00 13104.00
10885.00 12756.00
09/30/00 13446.00 12631.00
13743.00 11644.00
03/31/01 12418.00 10264.00
13386.00 10864.00
09/30/01 11631.00 9269.00
12489.00 10260.00
03/31/02 12914.00 10288.00
11945.00 8909.00
09/30/02 9907.00 7370.00
10634.00 7992.00
03/31/03 10086.00 7740.00
11934.00 8931.00
09/30/03 12428.00 9168.00
13879.00 10284.00
03/31/04 14541.00 10458.00
14191.00 10638.00
09/30/04 14238.00 10439.00
</Table>
11
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Past performance is not indicative of future results.)
PERFORMANCE AS OF SEPTEMBER 30, 2004
<Table>
<Caption>
---------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN
-------------------------------------------------------
NET ASSET MARKET FINANCIAL
VALUE VALUE SELECT SECTOR INDEX
---------------------------------------------------------------------------------
ONE YEAR ENDED 9/30/04 14.62% 14.39% 14.89%
---------------------------------------------------------------------------------
THREE YEARS ENDED 22.40% 22.28% 23.45%
9/30/04
---------------------------------------------------------------------------------
FIVE YEARS ENDED 41.08% 40.27% 43.15%
9/30/04
---------------------------------------------------------------------------------
SINCE INCEPTION(1) 35.02% 34.24% 44.38%
---------------------------------------------------------------------------------
<Caption>
------------------------- ------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
----------------------------------------------
NET ASSET MARKET FINANCIAL
VALUE VALUE SELECT SECTOR INDEX
---------------------------------------------------------------------------------
ONE YEAR ENDED 9/30/04 14.62% 14.39% 14.89%
---------------------------------------------------------------------------------
THREE YEARS ENDED 6.97% 6.93% 7.27%
9/30/04
---------------------------------------------------------------------------------
FIVE YEARS ENDED 7.12% 7.00% 7.44%
9/30/04
---------------------------------------------------------------------------------
SINCE INCEPTION(1) 5.34% 5.23% 6.57%
---------------------------------------------------------------------------------
</Table>
(1) Total returns are calculated based on the commencement of trading on the
AMEX, December 22, 1998.
(Average annual returns reflect past performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost. Past
performance is not indicative of future results.)
TOP FIVE HOLDINGS AS OF SEPTEMBER 30, 2004
<Table>
-----------------------------------------------------------------------------------------------------------------------------
DESCRIPTION CITIGROUP, AMERICAN INTERNATIONAL BANK OF AMERICA J.P. MORGAN WELLS FARGO &
INC. GROUP, INC. CORP. CHASE & CO., INC. CO.
-----------------------------------------------------------------------------------------------------------------------------
SHARES 2,389,949 1,201,916 1,876,398 1,643,008 778,800
-----------------------------------------------------------------------------------------------------------------------------
MARKET VALUE $105,444,550 81,718,269 81,304,325 65,276,708 46,439,844
-----------------------------------------------------------------------------------------------------------------------------
% OF 10.59 8.21 8.17 6.56 4.67
NET ASSETS
-----------------------------------------------------------------------------------------------------------------------------
</Table>
(The five largest holdings are subject to change, and there are no guarantees
the Fund will continue to remain invested in any particular company.)
INDUSTRY BREAKDOWN AS OF SEPTEMBER 30, 2004*
Pie Chart
<Table>
Banks 33.8
Diversified Financials 41.5
Insurance 22.4
Other Assets 0.1
Real Estate 2.2
</Table>
* The Fund's industry breakdown is expressed as a percentage of net assets
and may change over time.
12
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
CLOSING PRICE VS. NAV AS OF AS OF SEPTEMBER 30, 2004
<Table>
<Caption>
------------------------------------------------------------------------------------------------------------------------------
CLOSING PRICE ABOVE NAV CLOSING PRICE BELOW NAV
-------------------------------------------------------------------------------------------------
50-99 100-199 >200 50-99 100-199 >200
BASIS BASIS BASIS BASIS BASIS BASIS
POINTS POINTS POINTS POINTS POINTS POINTS
-------------------------------------------------------------------------------------------------
2004
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/04 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/04 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/04 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
2003
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/03 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/03 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/03 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/03 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
2002
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/02 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/02 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/02 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/02 1 0 0 1 0 0
------------------------------------------------------------------------------------------------------------------------------
2001
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/01 4 0 0 1 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/01 2 0 0 1 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/01 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/01 0 0 0 1 0 0
------------------------------------------------------------------------------------------------------------------------------
2000
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/00 2 0 0 1 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/00 1 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/00 2 1 1 6 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/00 1 0 0 1 0 0
------------------------------------------------------------------------------------------------------------------------------
</Table>
13
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE HEALTH CARE SELECT SECTOR SPDR FUND
The Health Care Select Sector SPDR Fund ("Fund") seeks to replicate the total
return of the Health Care Select Sector of the S&P 500 Index. To accomplish this
objective, the Fund utilizes a "passive" or indexing investment approach and
attempts to approximate the investment performance of its benchmark Select
Sector Index, before expenses, by investing in a portfolio of stocks that seek
to replicate the relevant Select Sector Index. For the twelve-month period
ending September 30, 2004, the Fund had a return of 4.57% as compared to the
Health Care Select Sector Index return of 4.87% and the total S&P 500 Index
return of 13.87%.
During the prior twelve months, three of the better performing stocks in this
fund were Aetna, Inc., C.R. Bard, Inc. and CIGNA Corp. Bard's strong return was
due to both improving gross margins and increasing new product demand. In
CIGNA'S case, significant growth in its health care business, as evidenced by
earnings growth and margin improvements, was the main reason for this stock's
performance. Similarly, the primary causes of Aetna's very solid return
continued to be the company's positive trends in membership numbers and gains in
operating expense efficiencies.
Of the stocks within this fund that posted declines during the past twelve
months, three of the worst performing issues were Watson Pharmaceuticals, Inc.,
MedImmune, Inc. and Tenet Healthcare Corp. In Watson's case, product delays and
disappointing gross margins led to this stock's decline. For MedImmune, the
stock's negative return primarily resulted from the product launch of Flumist
which was more expensive than expected to manufacture and met with disappointing
initial demand. Finally, Tenet's poor return was mainly caused by the combined
impact of debt issues and continued concerns regarding its success at cutting
costs. Also dragging on performance during the period was Merck & Co. The
stock's decline during the period was partly due to the decision to pull the
drug Vioxx off of the market because of concerns over side effects.
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT AT NET ASSET VALUE
HEALTH CARE SELECT SECTOR SPDR FUND
[LINE GRAPH]
<Table>
<Caption>
HEALTHCARE SELECT SECTOR SPDR
FUND S&P 500 INDEX
----------------------------- -------------
12/16/98 10000.00 10000.00
10817.00 10584.00
03/31/99 11659.00 11111.00
12297.00 11895.00
09/30/99 11203.00 11152.00
12988.00 12811.00
03/31/00 12937.00 13104.00
12352.00 12756.00
09/30/00 12193.00 12631.00
11486.00 11644.00
03/31/01 11357.00 10264.00
12430.00 10864.00
09/30/01 9913.00 9269.00
11464.00 10260.00
03/31/02 12440.00 10288.00
11576.00 8909.00
09/30/02 10735.00 7370.00
11270.00 7992.00
03/31/03 11379.00 7740.00
12499.00 8931.00
09/30/03 11934.00 9168.00
12933.00 10284.00
03/31/04 12869.00 10458.00
13204.00 10638.00
09/30/04 12480.00 10439.00
</Table>
14
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Past performance is not indicative of future results.)
PERFORMANCE AS OF SEPTEMBER 30, 2004
<Table>
<Caption>
--------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AVERAGE ANNUAL TOTAL RETURN
----------------------------------------------------------------------------------------------
NET ASSET MARKET HEALTH CARE SELECT NET ASSET MARKET HEALTH CARE
VALUE VALUE SECTOR INDEX VALUE VALUE SELECT SECTOR INDEX
--------------------------------------------------------------------------------------------------------------------------
ONE YEAR ENDED 9/30/04 4.57% 4.76% 4.87% 4.57% 4.76% 4.87%
--------------------------------------------------------------------------------------------------------------------------
THREE YEARS ENDED 25.93% 26.19% 27.00% 7.99% 8.06% 8.29%
9/30/04
--------------------------------------------------------------------------------------------------------------------------
FIVE YEARS ENDED 11.43% 11.58% 12.56% 2.19% 2.22% 2.39%
9/30/04
--------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION(1) 19.64% 19.97% 26.94% 3.15% 3.20% 4.22%
--------------------------------------------------------------------------------------------------------------------------
</Table>
(1) Total returns are calculated based on the commencement of trading on the
AMEX, December 22, 1998.
(Average annual returns reflect past performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost. Past
performance is not indicative of future results.)
TOP FIVE HOLDINGS AS OF SEPTEMBER 30, 2004
<Table>
--------------------------------------------------------------------------------------------------------------------
DESCRIPTION PFIZER, JOHNSON & JOHNSON MERCK & COMPANY, AMGEN, ELI LILLY
INC. CO. INC. INC. AND CO.
--------------------------------------------------------------------------------------------------------------------
SHARES 4,464,981 1,755,163 1,311,151 748,632 668,560
--------------------------------------------------------------------------------------------------------------------
MARKET VALUE $136,628,419 98,868,332 43,267,983 42,432,462 40,147,028
--------------------------------------------------------------------------------------------------------------------
% OF 16.89 12.22 5.35 5.24 4.96
NET ASSETS
--------------------------------------------------------------------------------------------------------------------
</Table>
(The five largest holdings are subject to change, and there are no guarantees
the Fund will continue to remain invested in any particular company.)
INDUSTRY BREAKDOWN AS OF SEPTEMBER 30, 2004*
[PIE GRAPH]
<Table>
Biotechnology 8.8
Health Care Equipment & Supplies 18.7
Health Care Providers & Services 15.9
Pharmaceuticals 56.6
</Table>
* The Fund's industry breakdown is expressed as a percentage of net assets
and may change over time.
15
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
CLOSING PRICE VS. NAV AS OF SEPTEMBER 30, 2004
<Table>
<Caption>
------------------------------------------------------------------------------------------------------------------------
CLOSING PRICE ABOVE NAV CLOSING PRICE BELOW NAV
-----------------------------------------------------------------------------------------
50-99 100-199 >200 50-99 100-199 >200
BASIS BASIS BASIS BASIS BASIS BASIS
POINTS POINTS POINTS POINTS POINTS POINTS
-----------------------------------------------------------------------------------------
2004
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/04 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/04 0 0 0 1 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/04 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
2003
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/03 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/03 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/03 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/03 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
2002
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/02 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/02 1 1 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/02 1 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/02 1 0 0 3 0 0
------------------------------------------------------------------------------------------------------------------------------
2001
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/01 1 0 0 10 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/01 2 0 0 4 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/01 2 1 0 3 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/01 3 0 0 7 0 0
------------------------------------------------------------------------------------------------------------------------------
2000
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/00 4 0 0 5 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/00 0 0 0 8 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/00 2 0 0 7 1 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/00 2 1 0 10 1 0
------------------------------------------------------------------------------------------------------------------------------
</Table>
16
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE INDUSTRIAL SELECT SECTOR SPDR FUND
The Industrial Select Sector SPDR Fund ("Fund") seeks to replicate the total
return of the Industrial Select Sector of the S&P 500 Index. To accomplish this
objective, the Fund utilizes a "passive" or indexing investment approach and
attempts to approximate the investment performance of its benchmark Select
Sector Index, before expenses, by investing in a portfolio of stocks that seek
to replicate the relevant Select Sector Index. For the twelve-month period
ending September 30, 2004, the Fund had a return of 23.64% as compared to the
Industrial Select Sector Index return of 24.02% and the total S&P 500 Index
return of 13.87%.
Within the Industrial Select Sector SPDR Fund, three of the better performing
stocks over the prior twelve months were Cummins, Inc., Textron, Inc., and
Norfolk Southern Corp. In Cummins' case, the stock's positive return was mainly
fueled by strong results in all of its business segments primarily in the engine
division. For Textron, its gains were caused both by the positive trends in
current earnings and continued growth in Cessna orders. Finally, Norfolk's solid
return was a result of both increased sales and better success at managing
expenses.
During the past twelve months, three of the worst performing stocks in this fund
were Delta Air Lines, Inc., Power-One, Inc. and Southwest Airlines Co. Both
Delta and Southwest were hurt by increasingly contentious labor negotiations,
the continued depressed business travel environment, the rising fuel prices and
the escalating threat of upstart low cost carriers. When compared to the low
cost carriers, Delta's weaker competitive position was the primary cause of the
return differential between these two firms. The primary cause of Power-One's
poor performance was slower than expected sales which were mainly a result of
hesitancy on the part of its business customers to invest in capital equipment.
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT AT NET ASSET VALUE
INDUSTRIAL SELECT SECTOR SPDR FUND
[LINE GRAPH]
<Table>
<Caption>
INDUSTRIAL SELECT SECTOR SPDR
FUND S&P 500 INDEX
----------------------------- -------------
12/16/98 10000 10000
10759 10584
03/31/99 11010 11111
13153 11895
09/30/99 12740 11152
13223 12811
03/31/00 13001 13104
12786 12756
09/30/00 13645 12631
14150 11644
03/31/01 12030 10264
13194 10864
09/30/01 10766 9269
12696 10260
03/31/02 12498 10288
10986 8909
09/30/02 9019 7370
9557 7992
03/31/03 8996 7740
10448 8931
09/30/03 10923 9168
12662 10284
03/31/04 12534 10458
13587 10638
09/30/04 13501 10439
</Table>
(Past performance is not indicative of future results.)
17
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
PERFORMANCE AS OF SEPTEMBER 30, 2004
<Table>
<Caption>
----------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AVERAGE ANNUAL TOTAL RETURN
------------------------------------------------------------------------------------------------
NET ASSET MARKET INDUSTRIAL NET ASSET MARKET INDUSTRIAL
VALUE VALUE SELECT SECTOR INDEX VALUE VALUE SELECT SECTOR INDEX
----------------------------------------------------------------------------------------------------------------------------
ONE YEAR ENDED 9/30/04 23.64% 23.54% 24.02% 23.64% 23.54% 24.02%
----------------------------------------------------------------------------------------------------------------------------
THREE YEARS ENDED 25.39% 25.10% 26.62% 7.83% 7.75% 8.19%
9/30/04
----------------------------------------------------------------------------------------------------------------------------
FIVE YEARS ENDED 5.94% 5.76% 7.75% 1.16% 1.13% 1.50%
9/30/04
----------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION(1) 31.25% 31.46% 37.63% 4.82% 4.85% 5.69%
----------------------------------------------------------------------------------------------------------------------------
</Table>
(1) Total returns are calculated based on the commencement of trading on the
AMEX, December 22, 1998.
(Average annual returns reflect past performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost. Past
performance is not indicative of future results.)
TOP FIVE HOLDINGS AS OF SEPTEMBER 30, 2004
<Table>
------------------------------------------------------------------------------------------------------------
DESCRIPTION GENERAL UNITED PARCEL 3M CO. TYCO UNITED
ELECTRIC SERVICE, INTERNATIONAL TECHNOLOGIES
CO. INC. LTD. CORP.
------------------------------------------------------------------------------------------------------------
SHARES 544,571 381,948 987,682 252,831
3,717,798
------------------------------------------------------------------------------------------------------------
MARKET VALUE 41,343,831 30,544,382 30,282,330 23,609,359
$124,843,657
------------------------------------------------------------------------------------------------------------
% OF 21.52 7.13 5.27 5.22 4.07
NET ASSETS
------------------------------------------------------------------------------------------------------------
</Table>
(The five largest holdings are subject to change, and there are no guarantees
the Fund will continue to remain invested in any particular company.)
INDUSTRY BREAKDOWN AS OF SEPTEMBER 30, 2004*
[PIE CHART]
<Table>
Aerospace & Defense 18.8
Air Freight & Logistics 9.9
Airlines 1
Building Products 2.2
Commercial Services & Supplies 10.7
Construction & Engineering 0.4
Electrical Equipment 4.2
Industrial Conglomerates 32.9
Machinery 14.7
Other Assets 0.1
Railroads 4.5
Trading Companies & Distributors 0.6
</Table>
* The Fund's industry breakdown is expressed as a percentage of net assets
and may change over time.
18
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
CLOSING PRICE VS. NAV AS OF SEPTEMBER 30, 2004
<Table>
<Caption>
------------------------------------------------------------------------------------------------------------------------------
CLOSING PRICE ABOVE NAV CLOSING PRICE BELOW NAV
-----------------------------------------------------------------------------------------
50-99 100-199 >200 50-99 100-199 >200
BASIS BASIS BASIS BASIS BASIS BASIS
POINTS POINTS POINTS POINTS POINTS POINTS
-----------------------------------------------------------------------------------------
2004
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/04 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/04 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/04 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
2003
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/03 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/03 1 0 0 1 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/03 1 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/03 3 0 0 1 0 0
------------------------------------------------------------------------------------------------------------------------------
2002
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/02 2 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/02 2 0 0 5 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/02 0 0 0 1 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/02 4 0 0 5 0 0
------------------------------------------------------------------------------------------------------------------------------
2001
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/01 4 0 0 4 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/01 3 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/01 1 0 0 3 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/01 1 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
2000
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/00 6 1 0 2 2 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/00 4 0 0 4 1 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/00 9 2 0 9 1 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/00 7 0 0 2 0 0
------------------------------------------------------------------------------------------------------------------------------
</Table>
19
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE MATERIALS SELECT SECTOR SPDR FUND
The Materials Select Sector SPDR Fund ("Fund") seeks to replicate the total
return of the Materials Select Sector of the S&P 500 Index. To accomplish this
objective, the Fund utilizes a "passive" or indexing investment approach and
attempts to approximate the investment performance of its benchmark Select
Sector Index, before expenses, by investing in a portfolio of stocks that seek
to replicate the relevant Select Sector Index. For the twelve-month period
ending September 30, 2004, the Fund returned 28.35% as compared to the Materials
Select Sector Index return of 28.77% and the total S&P 500 Index return of
13.87%
The best performing stock for the period was Allegheny Technologies, Inc. Other
names that were strong contributors included United States Steel Corp. and
Louisiana-Pacific Corp. Rising steel prices have contributed to higher profit
outlooks for US steel producers including US Steel Corp. and Allegheny
Technologies, Inc. Rising demand for steel and the strong interest from Chinese
companies has kept steel prices high through much of 2004. Allegheny
Technologies had also initiated a series of cost cutting measures designed to
save $200 million a year. Louisiana-Pacific benefited from the high demand and
pricing of forest products with lumber prices rising 75 percent from 2003.
The worst performing stocks in the Materials Select Sector were Sealed Air Corp.
and Du Pont (E.I.) de Nemours and Co. Sealed Air Corp. experienced uncertainty
regarding asbestos litigation claims from the acquisition of a W.R. Grace
business. Du Pont shares were affected by the rising cost of oil and natural
gas, used to run plants and ingredients in the production of chemicals.
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT AT NET ASSET VALUE
MATERIALS SELECT SECTOR SPDR FUND
[LINE GRAPH]
<Table>
<Caption>
MATERIALS SELECT SECTOR SPDR
FUND S&P 500 INDEX
---------------------------- -------------
12/16/98 10000 10000
10429 10584
03/31/99 10567 11111
12639 11895
09/30/99 11559 11152
12949 12811
03/31/00 11342 13104
9749 12756
09/30/00 8961 12631
10969 11644
03/31/01 10341 10264
11387 10864
09/30/01 10039 9269
11260 10260
03/31/02 12429 10288
12206 8909
09/30/02 9412 7370
10613 7992
03/31/03 9845 7740
11185 8931
09/30/03 11865 9168
14594 10284
03/31/04 14339 10458
14728 10638
09/30/04 15221 10439
</Table>
(Past performance is not indicative of future results.)
20
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
PERFORMANCE AS OF SEPTEMBER 30, 2004
<Table>
<Caption>
--------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AVERAGE ANNUAL TOTAL RETURN
----------------------------------------------------------------------------------------------
NET ASSET MARKET MATERIALS NET ASSET MARKET MATERIALS
VALUE VALUE SELECT SECTOR INDEX VALUE VALUE SELECT SECTOR INDEX
--------------------------------------------------------------------------------------------------------------------------
ONE YEAR ENDED 9/30/04 28.35% 28.58% 28.77% 28.35% 28.58% 28.77%
--------------------------------------------------------------------------------------------------------------------------
THREE YEARS ENDED 51.64% 52.70% 53.15% 14.89% 15.15% 15.27%
9/30/04
--------------------------------------------------------------------------------------------------------------------------
FIVE YEARS ENDED 31.67% 30.69% 34.26% 5.66% 5.50% 6.07%
9/30/04
--------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION(1) 51.42% 51.48% 55.53% 7.45% 7.46% 7.95%
--------------------------------------------------------------------------------------------------------------------------
</Table>
(1) Total returns are calculated based on the commencement of trading on the
AMEX, December 22, 1998.
(Average annual returns reflect past performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost. Past
performance is not indicative of future results.)
TOP FIVE HOLDINGS AS OF SEPTEMBER 30, 2004
<Table>
------------------------------------------------------------------------------------------------------
DESCRIPTION DU PONT DOW ALCOA, INTERNATIONAL NEWMONT
(E.I.) CHEMICAL INC. PAPER CO. MINING
DE NEMOURS & CO. CORP.
CO.
------------------------------------------------------------------------------------------------------
SHARES 2,023,375 1,904,749 1,765,115 985,867 764,126
------------------------------------------------------------------------------------------------------
MARKET VALUE $86,600,450 39,838,886 34,790,657
86,056,560 59,290,213
------------------------------------------------------------------------------------------------------
% OF 13.13 13.05 8.99 6.04 5.27
NET ASSETS
------------------------------------------------------------------------------------------------------
</Table>
(The five largest holdings are subject to change, and there are no guarantees
the Fund will continue to remain invested in any particular company.)
INDUSTRY BREAKDOWN AS OF SEPTEMBER 30, 2004*
(PIE CHART)
<Table>
Chemicals 51.8
Construction Materials 1.6
Containers & Packaging 5.8
Metals & Mining 24.2
Other Assets 0.1
Paper & Forest Products 16.5
</Table>
* The Fund's industry breakdown is expressed as a percentage of net assets
and may change over time.
21
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
CLOSING PRICE VS. NAV AS OF SEPTEMBER 30, 2004
<Table>
<Caption>
-----------------------------------------------------------------------------------------------------------------------------
CLOSING PRICE ABOVE NAV CLOSING PRICE BELOW NAV
----------------------------------------------------------------------------------------
50-99 100-199 >200 50-99 100-199 >200
BASIS BASIS BASIS BASIS BASIS BASIS
POINTS POINTS POINTS POINTS POINTS POINTS
----------------------------------------------------------------------------------------
2004
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/04 0 0 0 0 0 0
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/04 0 0 0 0 0 0
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/04 0 0 0 0 0 0
-----------------------------------------------------------------------------------------------------------------------------
2003
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/03 0 0 0 0 0 0
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/03 0 0 0 0 0 0
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/03 0 0 0 0 0 0
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/03 0 0 0 0 0 0
-----------------------------------------------------------------------------------------------------------------------------
2002
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/02 2 0 0 0 0 0
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/02 0 0 0 1 0 0
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/02 0 0 0 1 0 0
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/02 1 0 0 1 0 0
-----------------------------------------------------------------------------------------------------------------------------
2001
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/01 1 1 0 8 0 0
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/01 3 0 0 11 1 0
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/01 0 0 0 8 0 0
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/01 6 0 0 7 0 0
-----------------------------------------------------------------------------------------------------------------------------
2000
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/00 9 1 0 5 0 0
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/00 7 1 0 4 0 0
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/00 9 1 0 6 1 0
-----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/00 13 2 0 3 1 0
-----------------------------------------------------------------------------------------------------------------------------
</Table>
22
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE TECHNOLOGY SELECT SECTOR SPDR FUND
The Technology Select Sector SPDR Fund ("Fund") seeks to replicate the total
return of the Technology Select Sector of the S&P 500 Index. To accomplish this
objective, the Fund utilizes a "passive" or indexing investment approach and
attempts to approximate the investment performance of its benchmark Select
Sector Index, before expenses, by investing in a portfolio of stocks that seek
to replicate the Technology Select Sector Index. For the twelve-month period
ending September 30, 2004, the Fund returned 5.37% as compared to the Technology
Select Sector Index return of 5.65% and the total S&P 500 Index return of
13.87%.
The Technology Sector lagged the broader S&P 500 Index over the past twelve
months primarily due to weaknesses in the semiconductor industry. With lowered
sales outlooks, reports of inventory buildups, and a perception that the
industry has already passed its cyclical peak, the group together detracted
approximately 3% from the return of the sector. LSI Logic Corp., Applied Micro
Circuits Corp., PMC-Sierra, Inc., Teradyne, Inc. and Intel Corp., led the
semiconductor group downward. Software companies such as VERITAS Software Corp.,
Mercury Interactive Corp., and Siebel Systems, Inc., also weighed on the
sector's return during the period primarily due to missed earnings and weakening
customer demand.
Telecommunications companies and communications equipment manufacturers were the
largest positive contributors to the sector's performance over the past twelve
months. Even with growth in traditional wireline services slowing, consumer
spending on bundled communications services, which includes wireline, wireless,
internet, and cable or satellite television, has been climbing. Citizen's
Communications Co., Sprint Corp., Verizon Communications, Inc. and SBC
Communications, Inc. led the way in this group. The manufacturers of related
communications equipment benefited from this environment as well, with QUALCOMM,
Inc., Motorola, Inc., and Lucent Technologies, Inc., all posting strong returns.
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT AT NET ASSET VALUE
TECHNOLOGY SELECT SECTOR SPDR FUND
[LINE GRAPH]
<Table>
<Caption>
TECHNOLOGY SELECT SECTOR SPDR
FUND S&P 500 INDEX
----------------------------- -------------
12/16/98 10000 10000
10851 10584
03/31/99 12189 11111
13445 11895
09/30/99 13700 11152
18011 12811
03/31/00 20021 13104
17985 12756
09/30/00 15435 12631
10410 11644
03/31/01 8255 10264
9253 10864
09/30/01 6373 9269
8020 10260
03/31/02 7226 10288
5277 8909
09/30/02 3933 7370
4940 7992
03/31/03 4779 7740
5677 8931
09/30/03 6083 9168
6869 10284
03/31/04 6784 10458
6928 10638
09/30/04 6410 10439
</Table>
23
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Past performance is not indicative of future results.)
PERFORMANCE AS OF SEPTEMBER 30, 2004
<Table>
<Caption>
----------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AVERAGE ANNUAL TOTAL RETURN
------------------------------------------------------------------------------------------------
NET ASSET MARKET TECHNOLOGY NET ASSET MARKET TECHNOLOGY
VALUE VALUE SELECT SECTOR INDEX VALUE VALUE SELECT SECTOR INDEX
----------------------------------------------------------------------------------------------------------------------------
ONE YEAR ENDED 9/30/04 5.37% 5.29% 5.65% 5.37% 5.29% 5.65%
----------------------------------------------------------------------------------------------------------------------------
THREE YEARS ENDED 0.58% 0.27% 1.39% 0.19% 0.09% 0.46%
9/30/04
----------------------------------------------------------------------------------------------------------------------------
FIVE YEARS ENDED -53.22% -53.21% -52.59% -14.09% -14.09% -13.87%
9/30/04
----------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION(1) -39.76% -39.77% -34.97% -8.41% -8.41% -7.18%
----------------------------------------------------------------------------------------------------------------------------
</Table>
(1) Total returns are calculated based on the commencement of trading on the
AMEX, December 22, 1998.
(Average annual returns reflect past performance. Investment return and
principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
Past performance is not indicative of future results.)
TOP FIVE HOLDINGS AS OF SEPTEMBER 30, 2004
<Table>
-----------------------------------------------------------------------------------------------------------------------
DESCRIPTION MICROSOFT INTERNATIONAL INTEL CISCO SYSTEMS, VERIZON
CORP. BUSINESS MACHINES CORP. INC. COMMUNICATIONS,
CORP. INC.
-----------------------------------------------------------------------------------------------------------------------
SHARES 4,999,944 770,402 2,949,994 3,109,804 1,273,121
-----------------------------------------------------------------------------------------------------------------------
MARKET VALUE $138,248,452 66,054,267 59,176,880 56,287,452 50,135,505
-----------------------------------------------------------------------------------------------------------------------
% OF 14.77 7.06 6.32 6.01 5.36
NET ASSETS
-----------------------------------------------------------------------------------------------------------------------
</Table>
(The five largest holdings are subject to change, and there are no
guarantees the Fund will continue to remain invested in any particular
company.)
INDUSTRY BREAKDOWN AS OF SEPTEMBER 30, 2004*
[PIE CHART]
<Table>
Communications Equipment 14.4
Computers & Peripherals 18.4
Electronic Equipment & Instruments 1.9
Diversified Telecommunication Services 14.7
Other Assets 0.1
Semiconductor Equipment & Products 15
Information Services 6
Internet Software & Services 2.3
Software 23.2
Office Electronics 0.6
Wireless Telecommunication Services 3.4
</Table>
* The Fund's industry breakdown is expressed as a percentage of net assets
and may change over time.
24
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
CLOSING PRICE VS. NAV AS OF SEPTEMBER 30, 2004
<Table>
<Caption>
------------------------------------------------------------------------------------------------------------------------
CLOSING PRICE ABOVE NAV CLOSING PRICE BELOW NAV
-----------------------------------------------------------------------------------------
50-99 100-199 >200 50-99 100-199 >200
BASIS BASIS BASIS BASIS BASIS BASIS
POINTS POINTS POINTS POINTS POINTS POINTS
-----------------------------------------------------------------------------------------
2004
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/04 1 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/04 0 0 0 1 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/04 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
2003
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/03 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/03 0 0 0 1 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/03 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/03 0 0 0 1 0 0
------------------------------------------------------------------------------------------------------------------------------
2002
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/02 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/02 0 0 0 1 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/02 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/02 0 0 0 1 0 0
------------------------------------------------------------------------------------------------------------------------------
2001
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/01 1 0 0 2 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/01 1 1 0 1 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/01 1 1 0 2 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/01 1 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
2000
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/00 1 0 0 1 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/00 1 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/00 1 0 1 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/00 1 0 0 1 0 0
------------------------------------------------------------------------------------------------------------------------------
</Table>
25
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE UTILITIES SELECT SECTOR SPDR FUND
The Utilities Select Sector SPDR Fund ("Fund") seeks to replicate the total
return of the Utilities Select Sector of the S&P 500 Index. To accomplish this,
the Fund utilizes a "passive" or indexing investment approach and attempts to
approximate the investment performance of its benchmark Select Sector Index,
before expenses, by investing in a portfolio of stocks that seek to replicate
the relevant Select Sector Index. For the twelve-month period ending September
30, 2004, the Fund had a return of 19.13% as compared to the Utilities Select
Sector Index return of 19.59% and the total S&P 500 Index return of 13.87%.
Within this fund, three of the better performing stocks over the prior twelve
months were TXU Corp, Allegheny Energy, Inc. and AES Corp. TXU's strong return
was primarily caused by improved cost controls and the ongoing successful
restructuring of the company's debt burden. Similarly, Allegheny Energy, Inc.
was able to post a positive return in part due to its continued progress in
restructuring its existing obligations. Finally, AES Corp's positive performance
was mainly a function of its significant improvements in sales and gross
margins.
During the past twelve months, three of the worst performing stocks in the Fund
were Calpine Corp, Progress Energy, Inc. and TECO Energy, Inc. Calpine was hurt
by both an earnings shortfall and questions regarding a debt refinancing. In
Progress' case, the lackluster return resulted both from higher operating
expenses and lower wholesale sales. For Teco, its tepid return reflects its
continued efforts at restructuring the firm towards its core business areas.
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT AT NET ASSET VALUE
UTILITIES SELECT SECTOR SPDR FUND
[LINE GRAPH]
<Table>
<Caption>
UTILITIES SELECT SECTOR SPDR
FUND S&P 500 INDEX
---------------------------- -------------
12/16/98 10000 10000
10369 10584
03/31/99 9239 11111
10818 11895
09/30/99 10366 11152
10022 12811
03/31/00 9490 13104
9789 12756
09/30/00 11731 12631
12223 11644
03/31/01 11704 10264
11625 10864
09/30/01 11073 9269
10627 10260
03/31/02 10749 10288
9393 8909
09/30/02 7293 7370
7639 7992
03/31/03 7394 7740
8955 8931
09/30/03 8913 9168
9611 10284
03/31/04 10095 10458
9960 10638
09/30/04 10620 10439
</Table>
(Past performance is not indicative of future results.)
26
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
PERFORMANCE AS OF SEPTEMBER 30, 2004
<Table>
<Caption>
--------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AVERAGE ANNUAL TOTAL RETURN
----------------------------------------------------------------------------------------------
NET ASSET MARKET UTILITIES NET ASSET MARKET UTILITIES
VALUE VALUE SELECT SECTOR INDEX VALUE VALUE SELECT SECTOR INDEX
--------------------------------------------------------------------------------------------------------------------------
ONE YEAR ENDED 9/30/04 19.13% 18.31% 19.59% 19.13% 18.31% 19.59%
--------------------------------------------------------------------------------------------------------------------------
THREE YEARS ENDED -4.17% -4.04% -3.20% -1.41% -1.37% -1.08%
9/30/04
--------------------------------------------------------------------------------------------------------------------------
FIVE YEARS ENDED 2.45% 1.37% 3.81% 0.49% 0.27% 0.75%
9/30/04
--------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION(1) 3.93% 3.24% 7.20% 0.67% 0.55% 1.21%
--------------------------------------------------------------------------------------------------------------------------
</Table>
(1) Total returns are calculated based on the commencement of trading on the
AMEX, December 22, 1998.
(Average annual returns reflect past performance. Investment return and
principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
Past performance is not indicative of future results.)
TOP FIVE HOLDINGS AS OF SEPTEMBER 30, 2004
<Table>
--------------------------------------------------------------------------------------------------------------
DESCRIPTION EXELON SOUTHERN DOMINION DUKE ENERGY TXU
CORP. CO. RESOURCES, CORP. CORP.
INC.
--------------------------------------------------------------------------------------------------------------
SHARES 2,791,293 3,121,232 1,396,270 3,965,209 1,254,970
--------------------------------------------------------------------------------------------------------------
MARKET VALUE 93,574,535 91,106,617 90,763,634 60,138,162
$102,412,540
--------------------------------------------------------------------------------------------------------------
% OF 8.06 7.37 7.17 7.15 4.73
NET ASSETS
--------------------------------------------------------------------------------------------------------------
</Table>
(The five largest holdings are subject to change, and there are no
guarantees the Fund will continue to remain invested in any particular
company.)
INDUSTRY BREAKDOWN AS OF SEPTEMBER 30, 2004*
[PIE CHART]
<Table>
Electric Utilities 76.1
Gas Utilities 7.8
Multi-Utilities & Unregulated Power 16.1
</Table>
* The Fund's industry breakdown is expressed as a percentage of net assets
and may change over time.
27
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
CLOSING PRICE VS. NAV AS OF SEPTEMBER 30, 2004
<Table>
<Caption>
------------------------------------------------------------------------------------------------------------------------------
CLOSING PRICE ABOVE NAV CLOSING PRICE BELOW NAV
-----------------------------------------------------------------------------------------
50-99 100-199 >200 50-99 100-199 >200
BASIS BASIS BASIS BASIS BASIS BASIS
POINTS POINTS POINTS POINTS POINTS POINTS
-----------------------------------------------------------------------------------------
2004
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/04 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/04 0 0 0 1 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/04 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
2003
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/03 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/03 1 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/03 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/03 5 0 0 1 0 0
------------------------------------------------------------------------------------------------------------------------------
2002
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/02 4 0 0 2 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/02 2 0 0 3 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/02 0 0 0 1 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/02 2 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------
2001
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/01 2 0 0 4 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/01 3 0 0 3 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/01 0 0 0 3 1 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/01 1 1 0 8 1 0
------------------------------------------------------------------------------------------------------------------------------
2000
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 12/31/00 1 0 0 6 0 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 09/30/00 2 1 0 1 1 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 06/30/00 2 1 0 6 2 0
------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDING: 03/31/00 6 0 0 11 1 0
------------------------------------------------------------------------------------------------------------------------------
</Table>
28
THE CONSUMER DISCRETIONARY SELECT SECTOR SPDR FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2004
<Table>
<Caption>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ -----
COMMON STOCKS -- 100.0%
AUTO COMPONENTS -- 2.0%
Cooper Tire & Rubber Co. ........... 16,405 $ 330,889
Dana Corp. ......................... 32,769 579,684
Delphi Corp. ....................... 123,342 1,145,847
Goodyear Tire & Rubber Co. (The)
(a)............................... 38,825 416,980
Johnson Controls, Inc. ............. 42,097 2,391,531
Visteon Corp. ...................... 28,458 227,379
------------
5,092,310
------------
AUTOMOBILES -- 5.8%
Ford Motor Co. ..................... 404,374 5,681,455
General Motors Corp. ............... 124,774 5,300,399
Harley-Davidson, Inc. .............. 65,247 3,878,282
------------
14,860,136
------------
DISTRIBUTORS -- 0.6%
Genuine Parts Co. .................. 38,708 1,485,613
------------
HOTELS RESTAURANTS & LEISURE -- 13.0%
Carnival Corp. ..................... 139,899 6,615,824
Darden Restaurants, Inc. ........... 34,850 812,702
Harrah's Entertainment, Inc. ....... 24,889 1,318,619
Hilton Hotels Corp. ................ 85,082 1,602,945
International Game Technology....... 76,157 2,737,844
Marriott International, Inc. ....... 50,639 2,631,202
McDonald's Corp. ................... 277,621 7,781,717
Starbucks Corp. (a)................. 87,848 3,993,570
Starwood Hotels & Resorts Worldwide,
Inc. ............................. 45,992 2,134,949
Wendy's International, Inc. ........ 25,141 844,737
Yum Brands, Inc. ................... 64,239 2,611,958
------------
33,086,067
------------
HOUSEHOLD DURABLES -- 4.9%
Black & Decker Corp. ............... 17,747 1,374,328
Centex Corp. ....................... 27,258 1,375,439
Fortune Brands, Inc. ............... 31,866 2,360,952
KB HOME............................. 10,267 867,459
Leggett & Platt, Inc. .............. 42,308 1,188,855
Maytag Corp. ....................... 17,326 318,278
Newell Rubbermaid, Inc. ............ 60,504 1,212,500
Pulte Homes, Inc. .................. 28,103 1,724,681
Snap-on, Inc. ...................... 12,871 354,725
Stanley Works (The)................. 17,976 764,519
Whirlpool Corp. .................... 14,659 880,859
------------
12,422,595
------------
INTERNET & CATALOG RETAIL -- 5.3%
eBay, Inc. (a)...................... 146,127 13,434,917
------------
LEISURE EQUIPMENT & PRODUCTS -- 2.1%
Brunswick Corp. .................... 21,096 965,353
Eastman Kodak Co. .................. 63,108 2,033,340
Hasbro, Inc. ....................... 38,861 730,587
Mattel, Inc. ....................... 91,520 1,659,257
------------
5,388,537
------------
MEDIA -- 30.9%
Clear Channel Communications,
Inc. ............................. 130,374 4,063,758
Comcast Corp. (Class A) (a)......... 494,078 13,952,763
</Table>
<Table>
<Caption>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ -----
MEDIA -- (CONTINUED)
Disney (Walt) Co. (The)............. 454,083 $ 10,239,572
Dow Jones & Co., Inc. .............. 17,991 730,614
Gannett Co., Inc. .................. 58,843 4,928,690
Interpublic Group of Companies, Inc.
(a)............................... 93,313 988,185
Knight-Ridder, Inc. ................ 17,099 1,119,130
McGraw-Hill Cos., Inc. (The)........ 41,927 3,341,163
Meredith Corp. ..................... 11,058 568,160
New York Times Co. (The) (Class
A)................................ 32,421 1,267,661
Omnicom Group, Inc. ................ 41,356 3,021,469
Time Warner, Inc. (a)............... 1,010,637 16,311,681
Tribune Co. ........................ 70,350 2,894,902
Univision Communications, Inc.
(Class A) (a)..................... 71,202 2,250,695
Viacom, Inc. ....................... 383,484 12,869,723
------------
78,548,166
------------
MULTI-LINE RETAIL -- 9.7%
Big Lots, Inc. (a).................. 25,581 312,856
Dillard's, Inc. (Class A)........... 18,456 364,321
Dollar General Corp. ............... 72,689 1,464,683
Family Dollar Stores, Inc. ......... 37,240 1,009,204
Federated Department Stores,
Inc. ............................. 39,587 1,798,437
J.C. Penney Co., Inc. (Holding
Co.).............................. 63,663 2,246,031
Kohl's Corp. (a).................... 75,550 3,640,754
May Department Stores Co. .......... 64,425 1,651,213
Nordstrom, Inc. .................... 31,057 1,187,620
Sears, Roebuck & Co. ............... 46,881 1,868,208
Target Corp. ....................... 199,688 9,035,882
------------
24,579,209
------------
SPECIALTY RETAIL -- 21.8%
AutoNation, Inc. (a)................ 58,886 1,005,773
AutoZone, Inc. (a).................. 18,348 1,417,383
Bed Bath & Beyond, Inc. (a)......... 66,387 2,463,622
Best Buy Co., Inc. ................. 71,845 3,896,873
Boise Cascade Corp. ................ 19,319 642,936
Circuit City Stores, Inc. .......... 43,727 670,772
Gap, Inc. (The)..................... 199,769 3,735,680
Home Depot, Inc. ................... 485,188 19,019,370
Limited Brands...................... 104,405 2,327,187
Lowe's Companies, Inc. ............. 172,334 9,366,353
Office Depot, Inc. (a).............. 68,910 1,035,717
RadioShack Corp. ................... 35,454 1,015,403
Sherwin-Williams Co. (The).......... 31,560 1,387,378
Staples, Inc. ...................... 109,989 3,279,872
Tiffany & Co. ...................... 32,266 991,857
TJX Cos., Inc. (The)................ 108,012 2,380,584
Toys "R" Us, Inc. (a)............... 47,079 835,181
------------
55,471,941
------------
TEXTILES, APPAREL & LUXURY GOODS -- 3.9%
Coach, Inc. (a)..................... 41,584 1,763,993
Jones Apparel Group, Inc. .......... 27,589 987,686
Liz Claiborne, Inc. ................ 23,780 896,982
NIKE, Inc. (Class B)................ 58,139 4,581,353
</Table>
See accompanying notes to financial statements.
29
THE CONSUMER DISCRETIONARY SELECT SECTOR SPDR FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
SEPTEMBER 30, 2004
<Table>
<Caption>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ -----
TEXTILES, APPAREL & LUXURY GOODS -- (CONTINUED)
Reebok International Ltd. .......... 13,272 $ 487,348
V.F. Corp. ......................... 24,384 1,205,789
------------
9,923,151
------------
TOTAL COMMON STOCKS --
(Cost $268,283,507)............... 254,292,642
------------
SHORT TERM INVESTMENTS -- 0.2%
MONEY MARKET FUND -- 0.2%
AIM Short Term Investment Class
Prime Fund (Cost $609,825)........ 609,825 609,825
------------
TOTAL INVESTMENTS -- 100.2%
(Cost $268,893,332)............... 254,902,467
OTHER ASSETS AND
LIABILITIES -- (0.2)%............. (471,039)
------------
NET ASSETS -- 100.0%................ $254,431,428
============
</Table>
(a) Non-income producing security
See accompanying notes to financial statements.
30
THE CONSUMER STAPLES SELECT SECTOR SPDR FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2004
<Table>
<Caption>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ -----
COMMON STOCKS -- 99.8%
BEVERAGES -- 20.0%
Adolph Coors Co. (Class B).......... 43,763 $ 2,972,383
Anheuser-Busch Cos., Inc. .......... 470,099 23,481,445
Brown-Forman Corp. (Class B)........ 99,706 4,566,535
Coca-Cola Co. (The)................. 1,332,594 53,370,389
Coca-Cola Enterprises, Inc. ........ 324,411 6,131,368
Pepsi Bottling Group, Inc. (The).... 190,452 5,170,772
PepsiCo, Inc. ...................... 572,043 27,829,892
------------
123,522,784
------------
FOOD & DRUG RETAILING -- 33.3%
Albertson's, Inc. .................. 272,508 6,521,116
Costco Wholesale Corp. ............. 295,516 12,281,645
CVS Corp. .......................... 263,620 11,106,311
Kroger Co. (a)...................... 500,807 7,772,525
Safeway, Inc. (a)................... 322,489 6,227,262
Supervalu, Inc. .................... 129,749 3,574,585
Sysco Corp. ........................ 390,424 11,681,486
Wal-Mart Stores, Inc. .............. 2,329,763 123,943,392
Walgreen Co. ....................... 609,281 21,830,538
Winn-Dixie Stores, Inc. ............ 282,885 874,115
------------
205,812,975
------------
FOOD PRODUCTS -- 14.3%
Archer-Daniels-Midland Co. ......... 450,057 7,641,968
Campbell Soup Co. .................. 282,216 7,419,459
ConAgra Foods, Inc. ................ 347,040 8,922,398
General Mills, Inc. ................ 242,820 10,902,618
H.J. Heinz Co. ..................... 233,732 8,419,027
Hershey Foods Corp. ................ 170,834 7,979,656
Kellogg Co. ........................ 267,205 11,398,965
McCormick & Co., Inc. .............. 122,586 4,209,603
Sara Lee Corp. ..................... 506,975 11,589,449
Wm. Wrigley Jr., Co. ............... 149,985 9,495,550
------------
87,978,693
------------
</Table>
<Table>
<Caption>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ -----
HOUSEHOLD PRODUCTS -- 19.0%
Clorox Co. ......................... 149,066 $ 7,945,218
Colgate-Palmolive Co. .............. 319,610 14,439,980
Kimberly-Clark Corp. ............... 295,996 19,118,382
Procter & Gamble Co. ............... 1,396,038 75,553,576
------------
117,057,156
------------
PERSONAL PRODUCTS -- 6.7%
Alberto-Culver Co. (Class B)........ 85,149 3,702,279
Avon Products, Inc. ................ 300,984 13,146,981
Gillette Co. ....................... 589,949 24,624,471
------------
41,473,731
------------
TOBACCO -- 6.5%
Altria Group, Inc. ................. 551,388 25,937,291
Reynolds American, Inc. ............ 126,923 8,635,841
UST, Inc. .......................... 133,704 5,382,923
------------
39,956,055
------------
TOTAL COMMON STOCKS --
(Cost $641,188,059)............... 615,801,394
------------
SHORT TERM INVESTMENTS -- 0.5%
MONEY MARKET FUND -- 0.5%
AIM Short Term Investment Class
Prime Fund (Cost $3,049,681)...... 3,049,681 3,049,681
------------
TOTAL INVESTMENTS -- 100.3%
(Cost $644,237,740)............... 618,851,075
OTHER ASSETS AND
LIABILITIES -- (0.3)%............. (1,614,169)
------------
NET ASSETS -- 100.0%................ $617,236,906
============
</Table>
(a) Non-income producing income
See accompanying notes to financial statements.
31
THE ENERGY SELECT SECTOR SPDR FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2004
<Table>
<Caption>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ -----
COMMON STOCK -- 99.9%
ENERGY EQUIPMENT & SERVICES -- 19.3%
Baker Hughes, Inc. ................. 966,897 $ 42,272,737
BJ Services Co. (a)................. 597,294 31,304,179
Halliburton Co. .................... 1,246,112 41,981,513
Nabors Industries Ltd. (a).......... 556,601 26,355,057
Noble Corp. (a)..................... 571,671 25,696,611
Rowan Cos., Inc. (a)................ 788,820 20,824,848
Schlumberger Ltd. .................. 846,265 56,962,097
Transocean, Inc. (a)................ 1,031,293 36,899,664
--------------
282,296,706
--------------
OIL AND GAS SERVICES -- 80.6%
Amerada Hess Corp. ................. 367,133 32,674,837
Anadarko Petroleum Corp. ........... 704,059 46,721,355
Apache Corp. ....................... 902,121 45,205,283
Ashland, Inc. ...................... 403,317 22,618,017
Burlington Resources, Inc. ......... 1,138,263 46,441,131
ChevronTexaco Corp. ................ 4,216,424 226,168,983
ConocoPhillips...................... 1,444,624 119,687,099
Devon Energy Corp. ................. 679,113 48,223,814
El Paso Corp. ...................... 1,192,657 10,960,518
EOG Resources, Inc. ................ 503,295 33,141,976
Exxon Mobil Corp. .................. 6,314,031 305,157,118
Kerr-McGee Corp. ................... 649,633 37,191,489
</Table>
<Table>
<Caption>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ -----
OIL AND GAS SERVICES -- (CONTINUED)
Kinder Morgan, Inc. ................ 230,855 $ 14,502,311
Marathon Oil Corp. ................. 1,037,791 42,840,013
Occidental Petroleum Corp. ......... 1,011,843 56,592,379
Sunoco, Inc. ....................... 337,844 24,993,699
Unocal Corp. ....................... 835,629 35,932,047
Valero Energy Corp. ................ 237,917 19,083,323
Williams Cos., Inc. (The)........... 966,960 11,700,216
--------------
1,179,835,608
--------------
TOTAL COMMON STOCK --
(Cost $1,273,128,870)............. 1,462,132,314
--------------
SHORT TERM INVESTMENTS -- 0.5%
MONEY MARKET FUND -- 0.5%
AIM Short Term Investment Class
Prime Fund (Cost $6,357,393)...... 6,357,393 6,357,393
--------------
TOTAL INVESTMENTS -- 100.4%
(Cost $1,279,486,263)............. 1,468,489,707
OTHER ASSETS AND
LIABILITIES -- (0.4)%............. (5,256,567)
--------------
NET ASSETS -- 100.0%................ $1,463,233,140
==============
</Table>
(a) Non-income producing security
See accompanying notes to financial statements.
32
THE FINANCIAL SELECT SECTOR SPDR FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2004
<Table>
<Caption>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ -----
COMMON STOCKS -- 99.9%
BANKS -- 33.8%
AmSouth Bancorp.................... 163,573 $ 3,991,181
Bank of America Corp. ............. 1,876,398 81,304,325
Bank of New York Co., Inc. (The)... 358,016 10,443,327
BB&T Corp. ........................ 255,116 10,125,554
Comerica, Inc. .................... 78,608 4,665,385
Fifth Third Bancorp................ 262,463 12,918,429
First Horizon National Corp. ...... 57,137 2,477,460
Golden West Financial Corp. ....... 70,922 7,868,796
Huntington Bancshares, Inc. ....... 106,078 2,642,403
KeyCorp............................ 186,760 5,901,616
M & T Bank Corp. .................. 53,669 5,136,123
Marshall & Ilsley Corp. ........... 102,628 4,135,908
Mellon Financial Corp. ............ 197,157 5,459,277
National City Corp. ............... 305,034 11,780,413
North Fork Bancorporation, Inc. ... 143,899 6,396,311
Northern Trust Corp. .............. 101,756 4,151,645
PNC Financial Services Group....... 130,953 7,084,557
Regions Financial Corp. ........... 214,278 7,084,031
SouthTrust Corp. .................. 152,447 6,350,942
Sovereign Bancorp, Inc. ........... 158,324 3,454,630
SunTrust Banks, Inc. .............. 165,286 11,637,787
Synovus Financial Corp. ........... 140,893 3,684,352
U.S. Bancorp....................... 866,226 25,033,932
Wachovia Corp. .................... 603,578 28,337,987
Washington Mutual, Inc. ........... 401,877 15,705,353
Wells Fargo & Co. ................. 778,800 46,439,844
Zions Bancorp...................... 41,261 2,518,572
------------
336,730,140
------------
DIVERSIFIED FINANCIALS -- 41.5%
American Express Co. .............. 584,468 30,076,723
Bear Stearns Cos., Inc. ........... 47,263 4,545,283
Capital One Financial Corp. ....... 111,353 8,228,987
Charles Schwab Corp. (The)......... 630,842 5,797,438
Citigroup, Inc. ................... 2,389,949 105,444,550
Countrywide Financial Corp. ....... 259,468 10,220,444
E*Trade Financial Corp. (a)........ 169,874 1,939,961
Fannie Mae......................... 446,170 28,287,178
Federated Investors, Inc. (Class
B)............................... 49,767 1,415,373
Franklin Resources, Inc. .......... 115,585 6,445,020
Freddie Mac........................ 316,559 20,652,309
Goldman Sachs Group, Inc. ......... 223,888 20,875,317
Janus Capital Group, Inc. ......... 111,041 1,511,268
JPMorgan Chase & Co. .............. 1,643,008 65,276,708
Lehman Brothers Holdings, Inc. .... 124,812 9,950,013
MBNA Corp. ........................ 588,439 14,828,663
Merrill Lynch & Co., Inc. ......... 432,966 21,527,069
Moody's Corp. ..................... 67,922 4,975,286
Morgan Stanley Dean Witter &
Co. ............................. 506,294 24,960,294
Principal Financial Group.......... 145,303 5,226,549
Providian Financial Corp. (a)...... 134,078 2,083,572
SLM Corp. ......................... 200,535 8,943,861
State Street Corp. ................ 156,025 6,663,828
T. Rowe Price Group, Inc. ......... 58,538 2,981,926
------------
412,857,620
------------
</Table>
<Table>
<Caption>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ -----
INSURANCE -- 22.4%
ACE Ltd. .......................... 130,835 $ 5,241,250
AFLAC, Inc. ....................... 233,281 9,146,948
Allstate Corp. .................... 319,148 15,315,913
Ambac Financial Group, Inc. ....... 50,084 4,004,216
American International Group,
Inc. ............................ 1,201,916 81,718,269
Aon Corp. ......................... 145,696 4,187,303
Chubb Corp. ....................... 88,062 6,188,997
Cincinnati Financial Corp. ........ 77,869 3,209,760
Hartford Financial Services Group,
Inc. (The)....................... 135,669 8,401,981
Jefferson-Pilot Corp. ............. 62,381 3,097,840
Lincoln National Corp. ............ 80,544 3,785,568
Loews Corp. ....................... 85,646 5,010,291
Marsh & McLennan Cos., Inc. ....... 239,619 10,964,965
MBIA, Inc. ........................ 66,667 3,880,686
MetLife, Inc. ..................... 345,418 13,350,406
MGIC Investment Corp. ............. 45,902 3,054,778
Progressive Corp. (The)............ 99,834 8,460,932
Prudential Financial, Inc. ........ 238,859 11,235,927
SAFECO Corp. ...................... 58,517 2,671,301
St. Paul Travelers Cos., Inc.
(The)............................ 309,779 10,241,294
Torchmark Corp. ................... 51,272 2,726,645
UnumProvident Corp. ............... 137,388 2,155,618
XL Capital Ltd. ................... 63,875 4,726,111
------------
222,776,999
------------
REAL ESTATE -- 2.2%
Apartment Investment & Management
Co. (Class A).................... 43,535 1,514,147
Equity Office Properties Trust..... 186,542 5,083,270
Equity Residential Properties
Trust............................ 130,148 4,034,588
Plum Creek Timber Co., Inc. ....... 84,741 2,968,477
ProLogis........................... 83,795 2,952,936
Simon Property Group, Inc. ........ 96,205 5,159,474
------------
21,712,892
------------
TOTAL COMMON STOCKS --
(Cost $1,053,972,461)............ 994,077,651
------------
SHORT TERM INVESTMENTS -- 0.6%
MONEY MARKET FUND -- 0.6%
AIM Short Term Investment Class
Prime Fund (Cost $5,720,785)..... 5,720,785 5,720,785
------------
TOTAL INVESTMENTS -- 100.5%
(Cost $1,059,693,246)............ 999,798,436
OTHER ASSETS AND
LIABILITIES -- (0.5)%............ (4,562,673)
------------
NET ASSETS -- 100.0%............... $995,235,763
============
</Table>
(a) Non-income producing security
See accompanying notes to financial statements.
33
THE HEALTH CARE SELECT SECTOR SPDR FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2004
<Table>
<Caption>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ -----
COMMON STOCKS -- 100.0%
BIOTECHNOLOGY -- 8.8%
Amgen, Inc. (a)...................... 748,632 $ 42,432,462
Biogen Idec, Inc. (a)................ 205,011 12,540,523
Chiron Corp. (a)..................... 114,425 5,057,585
Genzyme Corp. (a).................... 137,052 7,456,999
MedImmune, Inc. (a).................. 153,078 3,627,949
------------
71,115,518
------------
HEALTH CARE EQUIPMENT & SUPPLIES -- 18.7%
Applera Corp. -- Applied Biosystems
Group.............................. 127,232 2,400,868
Bausch & Lomb, Inc. ................. 34,482 2,291,329
Baxter International, Inc. .......... 366,996 11,802,591
Becton, Dickinson and Co. ........... 153,466 7,934,192
Biomet, Inc. ........................ 154,639 7,249,476
Boston Scientific Corp. (a).......... 502,716 19,972,907
C.R. Bard, Inc. ..................... 65,905 3,732,200
Fisher Scientific International, Inc.
(a)................................ 67,280 3,924,442
Guidant Corp. ....................... 187,735 12,398,020
Hospira, Inc. (a).................... 92,037 2,816,332
Medtronic, Inc. ..................... 718,670 37,298,973
Millipore Corp. (a).................. 33,163 1,586,850
PerkinElmer, Inc. ................... 75,640 1,302,521
St. Jude Medical, Inc. (a)........... 106,631 8,026,115
Stryker Corp. ....................... 240,048 11,541,508
Thermo Electron Corp. (a)............ 97,832 2,643,421
Waters Corp. (a)..................... 70,484 3,108,344
Zimmer Holdings, Inc. (a)............ 147,267 11,639,984
------------
151,670,073
------------
HEALTH CARE PROVIDERS & SERVICES -- 15.9%
Aetna, Inc. ......................... 93,234 9,316,874
AmerisourceBergen Corp. ............. 69,034 3,707,816
Anthem, Inc. (a)..................... 84,719 7,391,733
Cardinal Health, Inc. ............... 256,513 11,227,574
Caremark Rx, Inc. (a)................ 275,584 8,837,979
CIGNA Corp. ......................... 84,120 5,857,275
Express Scripts, Inc. (Class A)
(a)................................ 48,673 3,180,294
HCA, Inc. ........................... 290,199 11,071,092
Health Management Associates,
Inc. .............................. 150,849 3,081,845
Humana, Inc. (a)..................... 103,045 2,058,839
</Table>
<Table>
<Caption>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ -----
HEALTH CARE PROVIDERS & SERVICES -- (CONTINUED)
IMS Health, Inc. .................... 145,661 $ 3,484,211
Manor Care, Inc. .................... 57,609 1,725,966
McKesson Corp. ...................... 177,961 4,564,700
Medco Health Solutions, Inc. (a)..... 164,486 5,082,617
Quest Diagnostics, Inc. ............. 63,426 5,595,442
Tenet Healthcare Corp. (a)........... 286,155 3,087,612
UnitedHealth Group, Inc. ............ 397,271 29,294,763
Wellpoint Health Networks, Inc.
(a)................................ 94,588 9,940,253
------------
128,506,885
------------
PHARMACEUTICALS -- 56.6%
Abbott Laboratories.................. 782,488 33,146,192
Allergan, Inc. ...................... 79,699 5,782,162
Bristol-Myers Squibb Co. ............ 1,156,061 27,363,964
Eli Lilly and Co. ................... 668,560 40,147,028
Forest Laboratories, Inc. (a)........ 220,782 9,930,774
Gilead Sciences, Inc. (a)............ 252,868 9,452,206
Johnson & Johnson.................... 1,755,163 98,868,332
King Pharmaceuticals, Inc. (a)....... 154,239 1,841,614
Merck & Co., Inc. ................... 1,311,151 43,267,983
Mylan Laboratories, Inc. ............ 159,732 2,875,176
Pfizer, Inc. ........................ 4,464,981 136,628,419
Schering-Plough Corp. ............... 877,875 16,732,297
Watson Pharmaceuticals, Inc. (a)..... 68,123 2,006,903
Wyeth................................ 792,608 29,643,539
------------
457,686,589
------------
TOTAL COMMON STOCKS --
(Cost $837,610,028)................ 808,979,065
------------
SHORT TERM INVESTMENTS -- 0.3%
MONEY MARKET FUND -- 0.3%
AIM Short Term Investment Class Prime
Fund (Cost $2,219,963)............. 2,219,963 2,219,963
------------
TOTAL INVESTMENTS -- 100.3%
(Cost $839,829,991)................ 811,199,028
OTHER ASSETS AND LIABILITIES --
(0.3)%............................. (2,030,731)
------------
NET ASSETS -- 100.0%................. $809,168,297
============
</Table>
(a) Non-income producing security
See accompanying notes to financial statements.
34
THE INDUSTRIAL SELECT SECTOR SPDR FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2004
<Table>
<Caption>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ -----
COMMON STOCKS -- 99.9%
AEROSPACE & DEFENSE -- 18.8%
Boeing Co. .......................... 417,066 $ 21,528,947
General Dynamics Corp. .............. 103,032 10,519,567
Goodrich (B.F.) Co. (The)............ 86,247 2,704,706
Honeywell International, Inc. ....... 431,515 15,474,128
Lockheed Martin Corp. ............... 224,170 12,504,203
Northrop Grumman Corp. .............. 184,666 9,848,238
Raytheon Co. ........................ 234,789 8,917,286
Rockwell Collins, Inc. .............. 108,716 4,037,712
United Technologies Corp. ........... 252,831 23,609,359
------------
109,144,146
------------
AIR FREIGHT & LOGISTICS -- 9.9%
FedEx Corp. ......................... 153,196 13,127,365
Ryder System, Inc. .................. 56,125 2,640,120
United Parcel Service, Inc. (Class
B)................................. 544,571 41,343,831
------------
57,111,316
------------
AIRLINES -- 1.0%
Delta Air Lines, Inc. (a)............ 103,694 341,153
Southwest Airlines Co. .............. 411,125 5,599,523
------------
5,940,676
------------
BUILDING PRODUCTS -- 2.2%
American Standard Cos., Inc. (a)..... 126,764 4,932,387
Masco Corp. ......................... 229,414 7,921,666
------------
12,854,053
------------
COMMERCIAL SERVICES & SUPPLIES -- 10.7%
Allied Waste Industries, Inc. (a).... 240,292 2,126,584
Apollo Group, Inc. (Class A) (a)..... 103,100 7,564,447
Avery Dennison Corp. ................ 65,000 4,275,700
Block (H&R), Inc. ................... 91,866 4,540,018
Cendant Corp. ....................... 537,858 11,617,733
Cintas Corp. ........................ 98,096 4,123,956
Deluxe Corp. ........................ 35,994 1,476,474
Equifax, Inc. ....................... 88,488 2,332,544
Monster Worldwide, Inc. (a).......... 90,257 2,223,932
Pitney Bowes, Inc. .................. 125,825 5,548,882
R.R. Donnelley & Sons Co. ........... 149,975 4,697,217
Robert Half International, Inc. ..... 115,532 2,977,260
Waste Management, Inc. .............. 301,667 8,247,576
------------
61,752,323
------------
CONSTRUCTION & ENGINEERING -- 0.4%
Fluor Corp. ......................... 57,539 2,561,636
------------
ELECTRICAL EQUIPMENT -- 4.2%
American Power Conversion Corp. ..... 133,900 2,328,521
Cooper Industries Ltd (Class A)...... 60,374 3,562,066
Emerson Electric Co.................. 211,591 13,095,367
Power-One, Inc. (a).................. 127,219 824,379
Rockwell Automation, Inc. ........... 114,182 4,418,843
------------
24,229,176
------------
</Table>
<Table>
<Caption>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ -----
INDUSTRIAL CONGLOMERATES -- 32.9%
3M Co. .............................. 381,948 $ 30,544,382
General Electric Co. ................ 3,717,798 124,843,657
Textron, Inc. ....................... 81,572 5,242,632
Tyco International Ltd. ............. 987,682 30,282,330
------------
190,913,001
------------
MACHINERY -- 14.7%
Caterpillar, Inc. ................... 173,663 13,971,188
Crane Co. ........................... 56,680 1,639,186
Cummins, Inc. ....................... 38,783 2,865,676
Danaher Corp. ....................... 164,597 8,440,534
Deere & Co. ......................... 132,358 8,543,709
Dover Corp. ......................... 116,669 4,534,924
Eaton Corp. ......................... 87,438 5,544,444
Illinois Tool Works, Inc. ........... 152,769 14,233,488
Ingersoll-Rand Co. (Class A)......... 95,464 6,488,688
ITT Industries, Inc. ................ 53,501 4,279,545
Navistar International Corp. (a)..... 52,202 1,941,392
PACCAR, Inc. ........................ 96,061 6,639,736
Pall Corp. .......................... 87,043 2,130,813
Parker-Hannifin Corp. ............... 71,797 4,225,971
------------
85,479,294
------------
RAILROADS -- 4.5%
Burlington Northern Santa Fe
Corp. ............................. 198,359 7,599,133
CSX Corp. ........................... 122,913 4,080,712
Norfolk Southern Corp. .............. 218,673 6,503,335
Union Pacific Corp. ................. 134,164 7,862,010
------------
26,045,190
------------
TRADING COMPANIES & DISTRIBUTORS -- 0.6%
W.W. Grainger, Inc. ................. 56,499 3,257,167
------------
TOTAL COMMON STOCKS --
(Cost $559,208,164)................ 579,287,978
------------
SHORT TERM INVESTMENTS -- 0.3%
MONEY MARKET FUND -- 0.3%
AIM Short Term Investment Class Prime
Fund (Cost $2,029,359)............. 2,029,359 2,029,359
------------
TOTAL INVESTMENTS -- 100.2%
(Cost $561,237,523)................ 581,317,337
OTHER ASSETS AND
LIABILITIES -- (0.2)%.............. (1,259,868)
------------
NET ASSETS -- 100.0%................. $580,057,469
============
</Table>
(a) Non-income producing security
See accompanying notes to financial statements.
35
THE MATERIALS SELECT SECTOR SPDR FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2004
<Table>
<Caption>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ -----
COMMON STOCKS -- 99.9%
CHEMICALS -- 51.8%
Air Products & Chemicals, Inc. ...... 465,615 $ 25,320,144
Dow Chemical Co. .................... 1,904,749 86,056,560
Du Pont (E.I.) de Nemours and Co. ... 2,023,375 86,600,450
Eastman Chemical Co. ................ 163,098 7,755,310
Ecolab, Inc. ........................ 528,422 16,613,587
Engelhard Corp. ..................... 259,646 7,360,964
Great Lakes Chemical Corp. .......... 112,510 2,880,256
Hercules, Inc. (a)................... 245,508 3,498,489
International Flavors & Fragrances,
Inc. .............................. 197,881 7,559,054
Monsanto Co. ........................ 550,278 20,041,125
PPG Industries, Inc. ................ 351,716 21,553,156
Praxair, Inc. ....................... 665,528 28,444,667
Rohm & Haas Co. ..................... 460,702 19,796,365
Sigma-Aldrich Corp. ................. 143,621 8,330,018
------------
341,810,145
------------
CONSTRUCTION MATERIALS -- 1.6%
Vulcan Materials Co. ................ 212,278 10,815,564
------------
CONTAINERS & PACKAGING -- 5.8%
Ball Corp. .......................... 237,286 8,881,615
Bemis Co., Inc. ..................... 224,253 5,960,645
Pactiv Corp. (a)..................... 313,822 7,296,361
Sealed Air Corp. (a)................. 175,297 8,125,016
Temple-Inland, Inc. ................. 116,748 7,839,628
------------
38,103,265
------------
</Table>
<Table>
<Caption>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ -----
METALS & MINING -- 24.2%
Alcoa, Inc. ......................... 1,765,115 $ 59,290,213
Allegheny Technologies, Inc. ........ 227,647 4,154,558
Freeport-McMoran Copper & Gold, Inc.
(Class B).......................... 368,556 14,926,518
Newmont Mining Corp. (Holding Co.)... 764,126 34,790,657
Nucor Corp. ......................... 164,511 15,031,370
Phelps Dodge Corp. .................. 195,382 17,981,005
United States Steel Corp. ........... 242,915 9,138,462
Worthington Industries, Inc. ........ 188,870 4,032,375
------------
159,345,158
------------
PAPER & FOREST PRODUCTS -- 16.5%
Georgia-Pacific Corp. ............... 533,531 19,180,440
International Paper Co. ............. 985,867 39,838,886
Louisiana-Pacific Corp. ............. 238,674 6,193,590
MeadWestvaco Corp. .................. 416,577 13,288,806
Weyerhaeuser Co. .................... 459,419 30,542,175
------------
109,043,897
------------
TOTAL COMMON STOCKS --
(Cost $644,301,257)................ 659,118,029
------------
SHORT TERM INVESTMENTS -- 0.4%
MONEY MARKET FUND -- 0.4%
AIM Short Term Investment Class Prime
Fund (Cost $2,592,268)............. 2,592,268 2,592,268
------------
TOTAL INVESTMENTS -- 100.3%
(Cost $646,893,525)................ 661,710,297
OTHER ASSETS AND
LIABILITIES -- (0.3)%.............. (2,025,208)
------------
NET ASSETS -- 100.0%................. $659,685,089
============
</Table>
(a) Non-income producing security
See accompanying notes to financial statements.
36
THE TECHNOLOGY SELECT SECTOR SPDR FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2004
<Table>
<Caption>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ -----
COMMON STOCKS -- 99.9%
COMMUNICATIONS EQUIPMENT -- 14.4%
ADC Telecommunications, Inc. (a)..... 427,092 $ 773,037
Andrew Corp. (a)..................... 93,387 1,143,057
Avaya, Inc. (a)...................... 275,862 3,845,516
CIENA Corp. (a)...................... 291,706 577,578
Cisco Systems, Inc. (a).............. 3,109,804 56,287,452
Comverse Technology, Inc. (a)........ 102,082 1,922,204
Corning, Inc. (a).................... 689,291 7,637,344
JDS Uniphase Corp. (a)............... 711,631 2,398,197
Lucent Technologies, Inc. (a)........ 2,098,453 6,652,096
Motorola, Inc........................ 1,100,695 19,856,538
QUALCOMM, Inc........................ 755,285 29,486,326
Scientific-Atlanta, Inc.............. 80,554 2,087,960
Tellabs, Inc. (a).................... 207,491 1,906,842
------------
134,574,147
------------
COMPUTERS & PERIPHERALS -- 18.4%
Apple Computer, Inc. (a)............. 187,765 7,275,894
Dell, Inc. (a)....................... 1,152,476 41,028,146
EMC Corp. (a)........................ 1,127,583 13,012,308
Gateway, Inc. (a).................... 218,037 1,079,283
Hewlett-Packard Co................... 1,395,460 26,164,875
International Business Machines
Corp. ............................. 770,402 66,054,267
Lexmark International, Inc. (a)...... 61,782 5,190,306
NCR Corp. (a)........................ 48,550 2,407,594
Network Appliance, Inc. (a).......... 176,225 4,053,175
Sun Microsystems, Inc. (a)........... 1,570,865 6,346,295
------------
172,612,143
------------
DIVERSIFIED TELECOMMUNICATION SERVICES -- 14.7%
ALLTEL Corp.......................... 144,147 7,915,112
AT&T Corp............................ 369,896 5,296,911
BellSouth Corp....................... 846,503 22,957,161
CenturyTel, Inc. .................... 66,019 2,260,490
Citizens Communications Co........... 166,640 2,231,310
Qwest Communications International,
Inc. (a)........................... 859,618 2,862,528
SBC Communications, Inc.............. 1,159,998 30,101,948
Sprint Corp.......................... 682,017 13,729,002
Verizon Communications, Inc. ........ 1,273,121 50,135,505
------------
137,489,967
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS -- 1.9%
Agilent Technologies, Inc. (a)....... 230,426 4,970,289
Jabil Circuit, Inc. (a).............. 99,298 2,283,854
Molex, Inc. ......................... 87,147 2,598,724
Sanmina-SCI Corp. (a)................ 269,784 1,901,977
Solectron Corp. (a).................. 484,512 2,398,334
Symbol Technologies, Inc............. 126,219 1,595,408
Tektronix, Inc....................... 49,279 1,638,527
------------
17,387,113
------------
</Table>
<Table>
<Caption>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ -----
INFORMATION SERVICES -- 6.0%
Affiliated Computer Services, Inc.
(a)................................ 58,824 $ 3,274,732
Automatic Data Processing, Inc....... 268,595 11,098,345
Computer Sciences Corp. (a).......... 90,694 4,271,687
Convergys Corp. (a).................. 65,827 884,057
Electronic Data Systems Corp......... 242,924 4,710,296
First Data Corp. .................... 394,305 17,152,268
Fiserv, Inc. (a)..................... 89,656 3,125,408
Paychex, Inc......................... 173,742 5,238,321
Sabre Holdings Corp.................. 63,884 1,567,075
SunGard Data Systems, Inc. (a)....... 138,796 3,299,181
Unisys Corp. (a)..................... 165,358 1,706,495
------------
56,327,865
------------
INTERNET SOFTWARE & SERVICES -- 2.3%
Yahoo!, Inc. (a)..................... 642,596 21,790,430
------------
OFFICE ELECTRONICS -- 0.6%
Xerox Corp. (a)...................... 403,399 5,679,858
------------
SEMICONDUCTOR EQUIPMENT & PRODUCTS -- 15.0%
Advanced Micro Devices, Inc. (a)..... 182,344 2,370,472
Altera Corp (a)...................... 180,757 3,537,415
Analog Devices, Inc.................. 179,158 6,947,747
Applied Materials, Inc. (a).......... 790,279 13,031,701
Applied Micro Circuits Corp. (a)..... 177,247 554,783
Broadcom Corp. (a)................... 157,187 4,289,633
Intel Corp........................... 2,949,994 59,176,880
KLA-Tencor Corp. (a)................. 93,918 3,895,719
Linear Technology Corp............... 145,947 5,289,119
LSI Logic Corp. (a).................. 197,697 852,074
Maxim Integrated Products, Inc. ..... 153,019 6,471,174
Micron Technology, Inc. (a).......... 293,011 3,524,922
National Semiconductor Corp. (a)..... 180,845 2,801,289
Novellus Systems, Inc. (a)........... 69,782 1,855,503
NVIDIA Corp. (a)..................... 87,111 1,264,852
PMC-Sierra, Inc. (a)................. 103,894 915,306
QLogic Corp. (a)..................... 46,194 1,367,804
Teradyne, Inc. (a)................... 98,744 1,323,170
Texas Instruments, Inc............... 804,180 17,112,950
Xilinx, Inc. ........................ 165,600 4,471,200
------------
141,053,713
------------
SOFTWARE -- 23.2%
Adobe Systems, Inc................... 115,206 5,699,241
Autodesk, Inc........................ 60,927 2,962,880
BMC Software, Inc. (a)............... 109,052 1,724,112
Citrix Systems, Inc. (a)............. 87,670 1,535,978
Computer Associates International,
Inc. .............................. 278,337 7,320,263
Compuware Corp. (a).................. 206,349 1,062,697
Electronic Arts, Inc. (a)............ 144,386 6,640,312
Intuit, Inc. (a)..................... 90,489 4,108,201
Mercury Interactive Corp. (a)........ 46,822 1,633,151
Microsoft Corp....................... 4,999,944 138,248,452
Novell, Inc. (a)..................... 215,440 1,359,426
Oracle Corp. (a)..................... 2,388,967 26,947,548
Parametric Technology Corp. (a)...... 173,901 918,197
PeopleSoft, Inc. (a)................. 174,970 3,473,155
Siebel Systems, Inc. (a)............. 247,629 1,867,123
Symantec Corp. (a)................... 144,938 7,954,197
VERITAS Software Corp. (a)........... 206,242 3,671,108
------------
217,126,041
------------
</Table>
See accompanying notes to financial statements.
37
THE TECHNOLOGY SELECT SECTOR SPDR FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
SEPTEMBER 30, 2004
<Table>
<Caption>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ -----
WIRELESS TELECOMMUNICATION SERVICES -- 3.4%
AT&T Wireless Services, Inc. (a)..... 1,274,178 $ 18,832,351
Nextel Communications, Inc. (a)...... 523,539 12,481,170
------------
31,313,521
------------
TOTAL COMMON STOCKS --
(Cost $1,472,471,404).............. 935,354,798
------------
</Table>
<Table>
<Caption>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ -----
SHORT TERM INVESTMENTS -- 0.1%
MONEY MARKET FUNDS -- 0.1%
AIM Short Term Investment Class Prime
Fund............................... 1,252,535 $ 1,252,535
Federated Prime Obligations Fund..... 2,694 2,694
------------
TOTAL SHORT TERM INVESTMENTS --
(Cost $1,255,229).................. 1,255,229
------------
TOTAL INVESTMENTS -- 100.0%
(Cost $1,473,726,633).............. 936,610,027
OTHER ASSETS AND LIABILITIES -- 0.0%
(B)................................ (418,267)
------------
NET ASSETS -- 100.0%................. $936,191,760
============
</Table>
(a) Non-income producing security
(b) Amount shown represents less than 0.1%
See accompanying notes to financial statements.
38
THE UTILITIES SELECT SECTOR SPDR FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2004
<Table>
<Caption>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ -----
COMMON STOCKS -- 100.0%
ELECTRIC UTILITIES -- 76.1%
Allegheny Energy, Inc. (a).......... 537,333 $ 8,575,835
Ameren Corp. ....................... 821,417 37,908,395
American Electric Power Co.,
Inc. ............................. 1,672,977 53,468,345
CenterPoint Energy, Inc. ........... 1,304,940 13,519,178
Cinergy Corp. ...................... 764,325 30,267,270
CMS Energy Corp. (a)................ 681,868 6,491,383
Consolidated Edison, Inc. .......... 1,020,962 42,921,242
Dominion Resources, Inc. ........... 1,396,270 91,106,617
DTE Energy Co. ..................... 736,761 31,083,947
Edison International................ 1,377,633 36,521,051
Entergy Corp. ...................... 959,390 58,148,628
Exelon Corp. ....................... 2,791,293 102,412,540
FirstEnergy Corp. .................. 1,394,594 57,289,922
FPL Group, Inc. .................... 783,661 53,539,720
PG&E Corp. (a)...................... 1,695,129 51,531,922
Pinnacle West Capital Corp. ........ 388,080 16,105,320
PPL Corp. .......................... 798,780 37,686,440
Progress Energy, Inc. .............. 1,045,469 44,265,157
Southern Co. (The).................. 3,121,232 93,574,535
TECO Energy, Inc. .................. 843,867 11,417,521
TXU Corp. .......................... 1,254,970 60,138,162
Xcel Energy, Inc. .................. 1,690,587 29,280,967
--------------
967,254,097
--------------
GAS UTILITIES -- 7.8%
KeySpan Corp. ...................... 677,284 26,549,533
Nicor, Inc. ........................ 186,517 6,845,174
NiSource, Inc. ..................... 1,114,075 23,406,715
Peoples Energy Corp. ............... 158,907 6,623,244
Sempra Energy....................... 980,080 35,469,095
--------------
98,893,761
--------------
</Table>
<Table>
<Caption>
SECURITY DESCRIPTION SHARES VALUE
- -------------------- ------ -----
MULTI-UTILITIES &
UNREGULATED POWER -- 16.1%
AES Corp. (a)....................... 2,733,237 $ 27,305,038
Calpine Corp. (a)................... 1,885,716 5,468,576
Constellation Energy Group, Inc. ... 741,910 29,557,695
Duke Energy Corp. .................. 3,965,209 90,763,634
Dynegy, Inc. (Class A) (a).......... 1,607,874 8,023,291
Public Service Enterprise Group,
Inc............................... 1,005,307 42,826,078
--------------
203,944,312
--------------
TOTAL COMMON STOCKS --
(Cost $1,204,309,731)............. 1,270,092,170
--------------
SHORT TERM INVESTMENTS -- 0.7%
MONEY MARKET FUND -- 0.7%
AIM Short Term Investment Class
Prime Fund (Cost $8,542,773)...... 8,542,773 8,542,773
--------------
TOTAL INVESTMENTS -- 100.7%
(Cost $1,212,852,504)............. 1,278,634,943
OTHER ASSETS AND
LIABILITIES -- (0.7)%............. (8,518,841)
--------------
NET ASSETS -- 100.0%................ $1,270,116,102
==============
</Table>
(a) Non-income producing security
See accompanying notes to financial statements.
39
THE SELECT SECTOR SPDR TRUST
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 2004
<Table>
<Caption>
THE CONSUMER THE CONSUMER
DISCRETIONARY STAPLES THE ENERGY THE FINANCIAL
SELECT SECTOR SELECT SECTOR SELECT SECTOR SELECT SECTOR
SPDR FUND SPDR FUND SPDR FUND SPDR FUND
------------- ------------- -------------- --------------
ASSETS
Investments in securities, at value (Note 2)........ $254,902,467 $618,851,075 $1,468,489,707 $ 999,798,436
Receivable for investments sold..................... -- -- -- 5,705,325
Receivable for income received for Select Sector
SPDRS
in-kind transactions.............................. -- -- -- 429,653
Dividends receivable (Note 2)....................... 164,769 1,212,400 947,479 988,625
Prepaid expenses.................................... 1,112 1,229 2,175 3,124
------------ ------------ -------------- --------------
TOTAL ASSETS................................. 255,068,348 620,064,704 1,469,439,361 1,006,925,163
------------ ------------ -------------- --------------
LIABILITIES
Payable for investments purchased................... -- -- -- 5,659,874
Payable for income delivered for Select Sector SPDRS
redeemed in-kind.................................. 3,167 110 -- --
Distribution payable (Note 2)....................... 447,343 2,537,356 5,635,344 5,603,073
Accrued advisory fees (Note 3)...................... 12,801 25,360 59,201 41,769
Accrued trustees fees (Note 3)...................... 1,497 2,326 4,793 4,397
Accrued distribution fees (Note 3).................. 82,219 102,615 125,716 146,422
Accrued Administration, Custodian and Transfer Agent
Fees (Note 3)..................................... 17,922 33,557 60,111 49,617
Accrued expenses and other liabilities.............. 71,971 126,474 321,056 184,248
------------ ------------ -------------- --------------
TOTAL LIABILITIES............................ 636,920 2,827,798 6,206,221 11,689,400
------------ ------------ -------------- --------------
NET ASSETS................................... $254,431,428 $617,236,906 $1,463,233,140 $ 995,235,763
============ ============ ============== ==============
NET ASSETS REPRESENTED BY:
Paid in surplus (Note 4)............................ 287,957,725 728,504,074 1,363,233,283 1,097,210,968
Undistributed (distributions in excess of) net
investment income................................. (199,186) (536,376) (1,698,916) (2,189,365)
Accumulated net realized gain (loss) on
investments....................................... (19,336,246) (85,344,127) (87,304,671) (39,891,030)
Net unrealized appreciation (depreciation) on
investments....................................... (13,990,865) (25,386,665) 189,003,444 (59,894,810)
------------ ------------ -------------- --------------
NET ASSETS...................................... $254,431,428 $617,236,906 $1,463,233,140 $ 995,235,763
============ ============ ============== ==============
NET ASSET VALUE PER SELECT SECTOR SPDR:
Net asset value per Select Sector SPDR share........ $ 31.22 $ 21.66 $ 35.00 $ 28.51
============ ============ ============== ==============
Shares outstanding (unlimited amount authorized,
$0.01 par value).................................. 8,150,291 28,501,009 41,801,904 34,907,308
============ ============ ============== ==============
Cost of investments................................. $268,893,332 $644,237,740 $1,279,486,263 $1,059,693,246
============ ============ ============== ==============
</Table>
See accompanying notes to financial statements.
40
<Table>
<Caption>
THE HEALTH CARE THE INDUSTRIAL THE MATERIALS THE TECHNOLOGY THE UTILITIES
SELECT SECTOR SELECT SECTOR SELECT SECTOR SELECT SECTOR SELECT SECTOR
SPDR FUND SPDR FUND SPDR FUND SPDR FUND SPDR FUND
--------------- -------------- ------------- --------------- --------------
$811,199,028 $581,317,337 $661,710,297 $ 936,610,027 $1,278,634,943
-- -- -- -- --
-- -- -- -- 84,246
945,072 1,075,434 959,472 352,835 2,064,248
1,703 2,402 2,591 4,645 5,158
------------ ------------ ------------ -------------- --------------
812,145,803 582,395,173 662,672,360 936,967,507 1,280,788,595
------------ ------------ ------------ -------------- --------------
-- -- -- 126,312 --
13,387 -- -- -- 2,831
2,582,413 2,016,014 2,627,766 -- 10,016,941
35,235 23,633 23,642 37,964 52,057
3,218 3,073 3,523 5,575 6,596
94,620 82,005 119,339 447,685 176,540
43,432 31,830 31,838 46,161 55,824
205,201 181,149 181,163 112,050 361,704
------------ ------------ ------------ -------------- --------------
2,977,506 2,337,704 2,987,271 775,747 10,672,493
------------ ------------ ------------ -------------- --------------
$809,168,297 $580,057,469 $659,685,089 $ 936,191,760 $1,270,116,102
============ ============ ============ ============== ==============
868,373,136 602,980,978 661,145,144 2,046,500,757 1,248,437,252
(781,958) 689,083 469,471 4,521,180 784,487
(29,791,918) (43,692,406) (16,746,298) (577,713,571) (44,888,076)
(28,630,963) 20,079,814 14,816,772 (537,116,606) 65,782,439
------------ ------------ ------------ -------------- --------------
$809,168,297 $580,057,469 $659,685,089 $ 936,191,760 $1,270,116,102
============ ============ ============ ============== ==============
$ 28.80 $ 28.36 $ 27.54 $ 19.10 $ 25.10
============ ============ ============ ============== ==============
28,100,887 20,450,533 23,953,161 49,002,885 50,611,900
============ ============ ============ ============== ==============
$839,829,991 $561,237,523 $646,893,525 $1,473,726,633 $1,212,852,504
============ ============ ============ ============== ==============
</Table>
41
THE SELECT SECTOR SPDR TRUST
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 2004
<Table>
<Caption>
THE CONSUMER THE CONSUMER
DISCRETIONARY STAPLES THE ENERGY THE FINANCIAL
SELECT SECTOR SELECT SECTOR SELECT SECTOR SELECT SECTOR
SPDR FUND SPDR FUND SPDR FUND SPDR FUND
------------- ------------- ------------- -------------
INVESTMENT INCOME
Dividend income (Note 2).............................. $ 2,685,507 $ 8,278,393 $ 17,890,872 $ 19,704,164
----------- ------------ ------------ ------------
EXPENSES
Administrator, Custodian and Transfer Agent fees (Note
3).................................................. 263,242 413,441 855,381 771,584
Distribution fee (Note 3)............................. 195,064 307,174 637,043 574,496
License fee (Note 3).................................. 167,198 263,292 546,037 492,425
Advisory fee (Note 3)................................. 139,331 219,410 455,031 410,354
Printing and postage expense.......................... 42,988 51,863 111,783 97,891
Professional fees..................................... 12,793 14,157 34,836 19,935
Trustee fees (Note 3)................................. 6,698 8,347 15,443 13,761
SEC registration expense.............................. 14,926 18,357 34,538 37,497
Insurance expense..................................... 2,817 3,643 5,848 9,598
Miscellaneous expenses................................ 1,108 1,844 3,461 2,938
----------- ------------ ------------ ------------
TOTAL EXPENSES BEFORE WAIVERS....................... 846,165 1,301,528 2,699,401 2,430,479
Expenses waived by Administrator, Custodian and
Transfer Agent (Note 3)............................. (73,652) (121,514) (286,715) (256,405)
----------- ------------ ------------ ------------
NET EXPENSES.......................................... 772,513 1,180,014 2,412,686 2,174,074
----------- ------------ ------------ ------------
NET INVESTMENT INCOME (LOSS).......................... 1,912,994 7,098,379 15,478,186 17,530,090
----------- ------------ ------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on investment transactions... 42,913,930 19,286,681 130,250,163 68,517,561
Net change in unrealized appreciation
(depreciation)...................................... (7,458,250) (15,720,680) 211,263,632 16,448,557
----------- ------------ ------------ ------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS....................................... 35,455,680 3,566,001 341,513,795 84,966,118
----------- ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS............................................ $37,368,674 $ 10,664,380 $356,991,981 $102,496,208
=========== ============ ============ ============
</Table>
See accompanying notes to financial statements.
42
<Table>
<Caption>
THE HEALTH CARE THE INDUSTRIAL THE MATERIALS THE TECHNOLOGY THE UTILITIES
SELECT SECTOR SELECT SECTOR SELECT SECTOR SELECT SECTOR SELECT SECTOR
SPDR FUND SPDR FUND SPDR FUND SPDR FUND SPDR FUND
--------------- -------------- ------------- -------------- -------------
$ 8,944,629 $ 9,783,673 $ 14,614,973 $ 9,687,732 $ 47,764,326
------------ ------------ ------------ ----------- ------------
570,916 536,332 614,772 968,072 1,148,475
424,715 398,902 457,008 720,940 855,754
364,042 341,916 391,721 617,948 733,503
303,368 284,930 326,434 514,957 611,252
83,175 90,881 106,761 130,351 188,641
26,734 27,047 32,582 24,045 54,583
13,708 13,072 14,917 22,379 25,213
25,406 31,597 32,437 53,341 66,798
4,091 5,554 6,135 14,361 12,248
2,164 2,587 2,640 5,202 5,017
------------ ------------ ------------ ----------- ------------
1,818,319 1,732,818 1,985,407 3,071,596 3,701,484
(174,506) (160,411) (191,062) (350,176) (442,174)
------------ ------------ ------------ ----------- ------------
1,643,813 1,572,407 1,794,345 2,721,420 3,259,310
------------ ------------ ------------ ----------- ------------
7,300,816 8,211,266 12,820,628 6,966,312 44,505,016
------------ ------------ ------------ ----------- ------------
22,378,865 102,464,088 74,329,106 24,864,297 198,653,052
(35,871,579) 4,855,058 41,231,830 27,586,411 (28,858,996)
------------ ------------ ------------ ----------- ------------
(13,492,714) 107,319,146 115,560,936 52,450,708 169,794,056
------------ ------------ ------------ ----------- ------------
$ (6,191,898) $115,530,412 $128,381,564 $59,417,020 $214,299,072
============ ============ ============ =========== ============
</Table>
43
THE SELECT SECTOR SPDR TRUST
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
THE CONSUMER DISCRETIONARY THE CONSUMER STAPLES
SELECT SECTOR SPDR FUND SELECT SECTOR SPDR FUND
--------------------------- ---------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
9/30/2004 9/30/2003 9/30/2004 9/30/2003
------------ ------------ ------------ ------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income (loss)........................... $ 1,912,994 $ 1,082,565 $ 7,098,379 $ 4,495,088
Net realized gain (loss) on investment transactions.... 42,913,930 3,427,570 19,286,681 (23,216,215)
Net change in unrealized appreciation (depreciation)... (7,458,250) 26,302,779 (15,720,680) 28,516,581
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS........................................... 37,368,674 30,812,914 10,664,380 9,795,454
------------ ------------ ------------ ------------
UNDISTRIBUTED NET INVESTMENT INCOME INCLUDED IN PRICE OF
UNITS ISSUED AND REDEEMED.............................. (62,924) 130,703 498,036 56,698
------------ ------------ ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.................................. (1,857,385) (1,186,210) (7,556,211) (4,528,088)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS FROM SPDRS
TRANSACTIONS (NOTE 4).................................. (10,204,060) 85,795,152 337,524,591 65,511,554
------------ ------------ ------------ ------------
Net increase (decrease) in net assets during year...... 25,244,305 115,552,559 341,130,796 70,835,618
Net assets at beginning of year........................ 229,187,123 113,634,564 276,106,110 205,270,492
------------ ------------ ------------ ------------
NET ASSETS END OF YEAR(1)................................ $254,431,428 $229,187,123 $617,236,906 $276,106,110
============ ============ ============ ============
(1) Including undistributed (distribution in excess of)
net investment income.............................. $ (199,186) $ (254,795) $ (536,376) $ (78,544)
============ ============ ============ ============
</Table>
See accompanying notes to financial statements.
44
<Table>
<Caption>
THE ENERGY THE FINANCIAL THE HEALTH CARE
SELECT SECTOR SPDR FUND SELECT SECTOR SPDR FUND SELECT SECTOR SPDR FUND
----------------------------- --------------------------- ---------------------------
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
9/30/2004 9/30/2003 9/30/2004 9/30/2003 9/30/2004 9/30/2003
-------------- ------------ ------------ ------------ ------------ ------------
$ 15,478,186 $ 6,945,552 $ 17,530,090 $ 14,262,398 $ 7,300,816 $ 2,653,552
130,250,163 4,899,983 68,517,561 64,669,231 22,378,865 265,660
211,263,632 34,876,256 16,448,557 77,323,781 (35,871,579) 13,643,673
-------------- ------------ ------------ ------------ ------------ ------------
356,991,981 46,721,791 102,496,208 156,255,410 (6,191,898) 16,562,885
-------------- ------------ ------------ ------------ ------------ ------------
1,137,806 (207,743) 621,404 (87,185) 789,572 293,336
-------------- ------------ ------------ ------------ ------------ ------------
(16,759,030) (6,750,742) (18,056,916) (14,072,829) (7,764,177) (2,961,960)
-------------- ------------ ------------ ------------ ------------ ------------
725,999,641 116,158,272 125,014,183 242,208,378 506,066,489 192,037,217
-------------- ------------ ------------ ------------ ------------ ------------
1,067,370,398 155,921,578 210,074,879 384,303,774 492,899,986 205,931,478
395,862,742 239,941,164 785,160,884 400,857,110 316,268,311 110,336,833
-------------- ------------ ------------ ------------ ------------ ------------
$1,463,233,140 $395,862,742 $995,235,763 $785,160,884 $809,168,297 $316,268,311
============== ============ ============ ============ ============ ============
$ (1,698,916) $ (418,072) $ (2,189,365) $ (960,944) $ (781,958) $ (318,597)
============== ============ ============ ============ ============ ============
</Table>
45
THE SELECT SECTOR SPDR TRUST
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
THE INDUSTRIAL THE MATERIALS
SELECT SECTOR SPDR FUND SELECT SECTOR SPDR FUND
----------------------------- ----------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
9/30/2004 9/30/2003 9/30/2004 9/30/2003
------------- ------------ ------------ ------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income (loss)....................... $ 8,211,266 $ 5,821,928 $ 12,820,628 $ 7,325,716
Net realized gain (loss) on investment
transactions..................................... 102,464,088 19,491,705 74,329,106 17,902,076
Net change in unrealized appreciation
(depreciation)................................... 4,855,058 48,937,077 41,231,830 35,191,473
------------- ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS.................................. 115,530,412 74,250,710 128,381,564 60,419,265
------------- ------------ ------------ ------------
UNDISTRIBUTED NET INVESTMENT INCOME INCLUDED IN PRICE
OF UNITS ISSUED AND REDEEMED....................... (458,904) 883,874 (714,818) 1,033,882
------------- ------------ ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................. (7,800,750) (5,963,416) (11,929,682) (7,973,938)
------------- ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS FROM SPDRS
TRANSACTIONS (NOTE 4).............................. (107,505,461) 424,340,134 96,875,528 233,948,493
------------- ------------ ------------ ------------
Net increase (decrease) in net assets during
year............................................. (234,703) 493,511,302 212,612,592 287,427,702
Net assets at beginning of year.................... 580,292,172 86,780,870 447,072,497 159,644,795
------------- ------------ ------------ ------------
NET ASSETS END OF YEAR(1)............................ $ 580,057,469 $580,292,172 $659,685,089 $447,072,497
============= ============ ============ ============
(1) Including undistributed (distribution in excess
of) net investment income...................... $ 689,083 $ 278,567 $ 469,471 $ (421,475)
============= ============ ============ ============
</Table>
See accompanying notes to financial statements.
46
<Table>
<Caption>
THE TECHNOLOGY THE UTILITIES
SELECT SECTOR SPDR FUND SELECT SECTOR SPDR FUND
- -------------------------------- --------------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
9/30/2004 9/30/2003 9/30/2004 9/30/2003
- -------------- -------------- -------------- --------------
$ 6,966,312 $ 6,413,493 $ 44,505,016 $ 30,580,258
24,864,297 (116,311,782) 198,653,052 1,884,847
27,586,411 484,426,359 (28,858,996) 148,394,701
- -------------- -------------- -------------- --------------
59,417,020 374,528,070 214,299,072 180,859,806
- -------------- -------------- -------------- --------------
689,027 (615,928) (2,300,994) 3,172,171
- -------------- -------------- -------------- --------------
(7,553,916) (2,618,188) (41,107,105) (33,590,987)
- -------------- -------------- -------------- --------------
(178,658,088) 58,415,669 (82,715,149) 892,255,123
- -------------- -------------- -------------- --------------
(126,105,957) 429,709,623 88,175,824 1,042,696,113
1,062,297,717 632,588,094 1,181,940,278 139,244,165
- -------------- -------------- -------------- --------------
$ 936,191,760 $1,062,297,717 $1,270,116,102 $1,181,940,278
============== ============== ============== ==============
4,521,180
$ $ 5,108,784 $ 784,487 $ (2,613,424)
============== ============== ============== ==============
</Table>
47
THE SELECT SECTOR SPDR TRUST
FINANCIAL HIGHLIGHTS
FOR A SELECT SECTOR SPDR OUTSTANDING THROUGHOUT EACH YEAR
<Table>
<Caption>
THE CONSUMER DISCRETIONARY
SELECT SECTOR SPDR FUND
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
09/30/04 09/30/03 09/30/02 09/30/01 09/30/00
-------- -------- -------- -------- --------
Net asset value, beginning of year................ $ 27.61 $ 22.73 $ 23.08 $ 24.89 $ 26.17
-------- -------- -------- -------- -------
Net investment income (loss)...................... 0.24 0.18 0.14 0.23 0.22
Net realized and unrealized gain (loss) (2)....... 3.59 4.84 (0.36) (1.80) (1.29)
-------- -------- -------- -------- -------
Total from investment operations.................. 3.83 5.02 (0.22) (1.57) (1.07)
-------- -------- -------- -------- -------
Undistributed net investment income included in
price of units issued and redeemed, net......... (0.01) 0.02 0.03 -- --
-------- -------- -------- -------- -------
Distributions to shareholders from:
Net investment income............................. (0.21) (0.16) (0.16) (0.24) (0.21)
Net realized gain (loss).......................... -- -- -- -- --
-------- -------- -------- -------- -------
Total distributions to shareholders............... (0.21) (0.16) (0.16) (0.24) (0.21)
-------- -------- -------- -------- -------
Net asset value, end of year...................... $ 31.22 $ 27.61 $ 22.73 $ 23.08 $ 24.89
======== ======== ======== ======== =======
Total return (3).................................. 13.83% 22.27% (0.93)% (6.46)% (4.12)%
======== ======== ======== ======== =======
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of year (in 000's)................ $254,431 $229,187 $113,635 $106,175 $89,615
Ratio of expenses to average net assets........... 0.28% 0.28% 0.27% 0.27% 0.43%
Ratio of expenses to average net assets before
waivers......................................... 0.30% 0.31% 0.31% 0.32% 0.51%
Ratio of net investment income (loss) to average
net assets...................................... 0.69% 0.66% 0.57% 0.89% 0.80%
Portfolio turnover rate (4)....................... 2.61% 28.68% 42.34% 4.71% 16.28%
</Table>
See accompanying notes to financial highlights on page 56.
48
THE SELECT SECTOR SPDR TRUST
FINANCIAL HIGHLIGHTS
FOR A SELECT SECTOR SPDR OUTSTANDING THROUGHOUT EACH YEAR
<Table>
<Caption>
THE CONSUMER STAPLES
SELECT SECTOR SPDR FUND
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
09/30/04 09/30/03 09/30/02 09/30/01 09/30/00
-------- -------- -------- -------- --------
Net asset value, beginning of year............... $ 20.30 $ 19.83 $ 25.10 $ 25.02 $ 22.63
-------- -------- -------- -------- --------
Net investment income (loss)..................... 0.34 0.34 0.43 0.27 0.30
Net realized and unrealized gain (loss) (2)...... 1.35 0.50 (5.29) 0.09 2.39
-------- -------- -------- -------- --------
Total from investment operations................. 1.69 0.84 (4.86) 0.36 2.69
-------- -------- -------- -------- --------
Undistributed net investment income included in
price of units issued and redeemed, net........ 0.02 -- (0.04) 0.03 (0.02)
-------- -------- -------- -------- --------
Distributions to shareholders from:
Net investment income............................ (0.35) (0.37) (0.37) (0.31) (0.28)
Net realized gain (loss)......................... -- -- -- -- --
-------- -------- -------- -------- --------
Total distributions to shareholders.............. (0.35) (0.37) (0.37) (0.31) (0.28)
-------- -------- -------- -------- --------
Net assets value, end of year.................... $ 21.66 $ 20.30 $ 19.83 $ 25.10 $ 25.02
======== ======== ======== ======== ========
Total return (3)................................. 8.38% 4.31% (19.68)% 1.53% 11.92%
======== ======== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of year (in 000's)............... $617,237 $276,106 $205,270 $368,956 $156,394
Ratio of expenses to average net assets.......... 0.27% 0.27% 0.28% 0.28% 0.42%
Ratio of expenses to average net assets before
waivers........................................ 0.30% 0.30% 0.32% 0.33% 0.50%
Ratio of net investment income (loss) to average
net assets..................................... 1.62% 1.87% 1.48% 1.21% 1.20%
Portfolio turnover rate (4)...................... 2.84% 37.16% 59.68% 6.42% 9.77%
</Table>
See accompanying notes to financial highlights on page 56.
49
THE SELECT SECTOR SPDR TRUST
FINANCIAL HIGHLIGHTS
FOR A SELECT SECTOR SPDR OUTSTANDING THROUGHOUT EACH YEAR
<Table>
<Caption>
THE ENERGY
SELECT SECTOR SPDR FUND
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
09/30/04 09/30/03 09/30/02 09/30/01 09/30/00
---------- -------- -------- -------- --------
Net asset value, beginning of year............. $ 23.99 $ 21.14 $ 25.90 $ 32.81 $ 27.46
---------- -------- -------- -------- --------
Net investment income (loss)................... 0.51(1) 0.50 0.43 0.45 0.55
Net realized and unrealized gain (loss) (2).... 10.98 2.83 (4.73) (6.90) 5.28
---------- -------- -------- -------- --------
Total from investment operations............... 11.49 3.33 (4.30) (6.45) 5.83
---------- -------- -------- -------- --------
Undistributed net investment income included in
price of units issued and redeemed, net...... 0.03 (0.01) 0.01 0.02 (0.01)
---------- -------- -------- -------- --------
Distributions to shareholders from:
Net investment income.......................... (0.51) (0.47) (0.47) (0.48) (0.47)
Net realized gain (loss)....................... -- -- -- -- --
---------- -------- -------- -------- --------
Total distributions to shareholders............ (0.51) (0.47) (0.47) (0.48) (0.47)
---------- -------- -------- -------- --------
Net assets value, end of year.................. $ 35.00 $ 23.99 $ 21.14 $ 25.90 $ 32.81
========== ======== ======== ======== ========
Total return (3)............................... 48.27% 15.87% (16.72)% (19.81)% 21.38%
========== ======== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of year (in 000's)............. $1,463,233 $395,863 $239,941 $244,739 $291,975
Ratio of expenses to average net assets........ 0.27% 0.28% 0.27% 0.28% 0.41%
Ratio of expenses to average net assets before
waivers...................................... 0.30% 0.31% 0.31% 0.33% 0.50%
Ratio of net investment income (loss) to
average net assets........................... 1.70% 2.06% 1.82% 1.56% 1.71%
Portfolio turnover rate (4).................... 9.70% 6.72% 38.55% 17.36% 30.76%
</Table>
See accompanying notes to financial highlights on page 56.
50
THE SELECT SECTOR SPDR TRUST
FINANCIAL HIGHLIGHTS
FOR A SELECT SECTOR SPDR OUTSTANDING THROUGHOUT EACH YEAR
<Table>
<Caption>
THE FINANCIAL
SELECT SECTOR SPDR FUND
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
09/30/04 09/30/03 09/30/02 09/30/01 09/30/00
-------- -------- -------- -------- --------
Net asset value, beginning of year............... $ 25.41 $ 20.66 $ 24.70 $ 28.96 $ 22.04
-------- -------- -------- -------- --------
Net investment income (loss)..................... 0.58 0.49(1) 0.49 0.41 0.35
Net realized and unrealized gain (loss) (2)...... 3.10 4.75 (4.03) (4.27) 6.91
-------- -------- -------- -------- --------
Total from investment operations................. 3.68 5.24 (3.54) (3.86) 7.26
-------- -------- -------- -------- --------
Undistributed net investment income included in
price of units issued and redeemed, net........ 0.02 -- (0.07) (0.01) --
-------- -------- -------- -------- --------
Distributions to shareholders from:
Net investment income............................ (0.60) (0.49) (0.43) (0.39) (0.34)
Net realized gain (loss)......................... -- -- -- -- --
-------- -------- -------- -------- --------
Total distributions to shareholders.............. (0.60) (0.49) (0.43) (0.39) (0.34)
-------- -------- -------- -------- --------
Net assets value, end of year.................... $ 28.51 $ 25.41 $ 20.66 $ 24.70 $ 28.96
======== ======== ======== ======== ========
Total return (3)................................. 14.62% 25.45% (14.87)% (13.50)% 33.24%
======== ======== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of year (in 000's)............... $995,236 $785,161 $400,857 $612,568 $430,141
Ratio of expenses to average net assets.......... 0.26% 0.28% 0.27% 0.27% 0.44%
Ratio of expenses to average net assets before
waivers........................................ 0.30% 0.32% 0.31% 0.32% 0.54%
Ratio of net investment income (loss) to average
net assets..................................... 2.14% 2.09% 1.70% 1.43% 1.45%
Portfolio turnover rate (4)...................... 8.67% 5.90% 10.58% 8.77% 7.02%
</Table>
See accompanying notes to financial highlights on page 56.
51
THE SELECT SECTOR SPDR TRUST
FINANCIAL HIGHLIGHTS
FOR A SELECT SECTOR SPDR OUTSTANDING THROUGHOUT EACH YEAR
<Table>
<Caption>
THE HEALTH CARE
SELECT SECTOR SPDR FUND
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
09/30/04 09/30/03 09/30/02 09/30/01 09/30/00
-------- -------- -------- -------- --------
Net asset value, beginning of year................ $ 27.86 $ 25.36 $ 23.55 $ 29.06 $ 26.85
-------- -------- -------- -------- -------
Net investment income (loss)...................... 0.36 0.32 0.14 0.07 0.03
Net realized and unrealized gain (loss) (2)....... 0.90 2.49 1.82 (5.49) 2.37
-------- -------- -------- -------- -------
Total from investment operations.................. 1.26 2.81 1.96 (5.42) 2.40
-------- -------- -------- -------- -------
Undistributed net investment income included in
price of units issued and redeemed, net......... 0.03 0.03 -- -- (0.01)
-------- -------- -------- -------- -------
Distributions to shareholders from:
Net investment income............................. (0.35) (0.34) (0.15) (0.08) --
Net realized gain (loss).......................... -- -- -- (0.01) (0.18)
-------- -------- -------- -------- -------
Total distributions to shareholders............... (0.35) (0.34) (0.15) (0.09) (0.18)
-------- -------- -------- -------- -------
Net assets value, end of year..................... $ 28.80 $ 27.86 $ 25.36 $ 23.55 $ 29.06
======== ======== ======== ======== =======
Total return (3).................................. 4.57% 11.22% 8.27% (18.71)% 8.84%
======== ======== ======== ======== =======
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of year (in 000's)................ $809,168 $316,268 $110,337 $114,228 $79,911
Ratio of expenses to average net assets........... 0.27% 0.28% 0.28% 0.28% 0.42%
Ratio of expenses to average net assets before
waivers......................................... 0.30% 0.31% 0.32% 0.33% 0.51%
Ratio of net investment income (loss) to average
net assets...................................... 1.20% 1.21% 0.49% 0.26% 0.10%
Portfolio turnover rate (4)....................... 7.15% 6.00% 102.64% 27.99% 21.88%
</Table>
See accompanying notes to financial highlights on page 56.
52
THE SELECT SECTOR SPDR TRUST
FINANCIAL HIGHLIGHTS
FOR A SELECT SECTOR SPDR OUTSTANDING THROUGHOUT EACH YEAR
<Table>
<Caption>
THE INDUSTRIAL
SELECT SECTOR SPDR FUND
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
09/30/04 09/30/03 09/30/02 09/30/01 09/30/00
-------- -------- -------- -------- --------
Net asset value, beginning of year............... $ 23.26 $ 19.50 $ 23.60 $ 30.30 $ 28.68
-------- -------- ------- ------- -------
Net investment income (loss)..................... 0.38(1) 0.35(1) 0.39 0.30 0.35
Net realized and unrealized gain (loss) (2)...... 5.12 3.70 (4.11) (6.66) 1.70
-------- -------- ------- ------- -------
Total from investment operations................. 5.50 4.05 (3.72) (6.36) 2.05
-------- -------- ------- ------- -------
Undistributed net investment income included in
price of units issued and redeemed, net........ (0.02) 0.04 (0.06) 0.02 (0.04)
-------- -------- ------- ------- -------
Distributions to shareholders from:
Net investment income............................ (0.38) (0.33) (0.32) (0.36) (0.31)
Net realized gain (loss)......................... -- -- -- -- (0.08)
-------- -------- ------- ------- -------
Total distributions to shareholders.............. (0.38) (0.33) (0.32) (0.36) (0.39)
-------- -------- ------- ------- -------
Net assets value, end of year.................... $ 28.36 $ 23.26 $ 19.50 $ 23.60 $ 30.30
======== ======== ======= ======= =======
Total return (3)................................. 23.64% 21.07% (16.24)% (21.10)% 7.10%
======== ======== ======= ======= =======
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of year (in 000's)............... $580,057 $580,292 $86,781 $67,265 $49,989
Ratio of expenses to average net assets.......... 0.28% 0.27% 0.28% 0.28% 0.44%
Ratio of expenses to average net assets before
waivers........................................ 0.30% 0.30% 0.31% 0.33% 0.51%
Ratio of net investment income (loss) to average
net assets..................................... 1.44% 1.59% 1.26% 1.25% 1.10%
Portfolio turnover rate (4)...................... 2.98% 14.85% 57.63% 7.14% 42.37%
</Table>
See accompanying notes to financial highlights on page 56.
53
THE SELECT SECTOR SPDR TRUST
FINANCIAL HIGHLIGHTS
FOR A SELECT SECTOR SPDR OUTSTANDING THROUGHOUT EACH YEAR
<Table>
<Caption>
THE MATERIALS
SELECT SECTOR SPDR FUND
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
09/30/04 09/30/03 09/30/02 09/30/01 09/30/00
-------- -------- -------- -------- --------
Net asset value, beginning of year............... $ 21.86 $ 17.74 $ 19.33 $ 18.03 $ 23.74
-------- -------- -------- ------- -------
Net investment income (loss)..................... 0.50(1) 0.44 0.43 0.36 0.45
Net realized and unrealized gain (loss) (2)...... 5.70 4.10 (1.60) 1.86 (5.66)
-------- -------- -------- ------- -------
Total from investment operations................. 6.20 4.54 (1.17) 2.22 (5.21)
-------- -------- -------- ------- -------
Undistributed net investment income included in
price of units issued and redeemed, net........ (0.03) 0.05 0.02 0.02 (0.07)
-------- -------- -------- ------- -------
Distributions to shareholders from:
Net investment income............................ (0.49) (0.47) (0.44) (0.43) (0.37)
Net realized gain (loss)......................... -- -- -- (0.51) (0.06)
-------- -------- -------- ------- -------
Total distributions to shareholders.............. (0.49) (0.47) (0.44) (0.94) (0.43)
-------- -------- -------- ------- -------
Net assets value, end of year.................... $ 27.54 $ 21.86 $ 17.74 $ 19.33 $ 18.03
======== ======== ======== ======= =======
Total return (3)................................. 28.35% 26.04% (6.27)% 12.08% (22.48)%
======== ======== ======== ======= =======
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of year (in 000's)............... $659,685 $447,072 $159,645 $99,541 $56,785
Ratio of expenses to average net assets.......... 0.27% 0.27% 0.28% 0.27% 0.43%
Ratio of expenses to average net assets before
waivers........................................ 0.30% 0.30% 0.31% 0.32% 0.51%
Ratio of net investment income (loss) to average
net assets..................................... 1.96% 2.39% 1.96% 2.12% 1.73%
Portfolio turnover rate (4)...................... 3.47% 3.94% 27.79% 5.59% 19.18%
</Table>
See accompanying notes to financial highlights on page 56.
54
THE SELECT SECTOR SPDR TRUST
FINANCIAL HIGHLIGHTS
FOR A SELECT SECTOR SPDR OUTSTANDING THROUGHOUT EACH YEAR
<Table>
<Caption>
THE TECHNOLOGY
SELECT SECTOR SPDR FUND
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
09/30/04 09/30/03 09/30/02 09/30/01 09/30/00
-------- ---------- -------- -------- ----------
Net asset value, beginning of year......... $ 18.25 $ 11.84 $ 19.18 $ 46.44 $ 41.22
-------- ---------- -------- -------- ----------
Net investment income (loss)............... 0.13(1) 0.10(1) 0.02(1) (0.01)(1) (0.08)
Net realized and unrealized gain (loss)
(2)...................................... 0.85 6.36 (7.34) (27.18) 5.31
-------- ---------- -------- -------- ----------
Total from investment operations........... 0.98 6.46 (7.32) (27.19) 5.23
-------- ---------- -------- -------- ----------
Undistributed net investment income
included in price of units issued and
redeemed, net............................ 0.01 (0.01) (0.02) (0.07) (0.01)
-------- ---------- -------- -------- ----------
Distributions to shareholders from:
Net investment income...................... (0.14) (0.04) -- -- --
Net realized gain (loss)................... -- -- -- -- --
-------- ---------- -------- -------- ----------
Total distributions to shareholders........ (0.14) (0.04) -- -- --
-------- ---------- -------- -------- ----------
Net assets value, end of year.............. $ 19.10 $ 18.25 $ 11.84 $ 19.18 $ 46.44
======== ========== ======== ======== ==========
Total return (3)........................... 5.37% 54.66% (38.28)% (58.71)% 12.67%
======== ========== ======== ======== ==========
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of year (in 000's)......... $936,192 $1,062,298 $632,588 $897,427 $1,042,665
Ratio of expenses to average net assets.... 0.26% 0.28% 0.27% 0.28% 0.42%
Ratio of expenses to average net assets
before waivers........................... 0.30% 0.32% 0.30% 0.33% 0.50%
Ratio of net investment income (loss) to
average net assets....................... 0.68% 0.65% 0.12% (0.05)% (0.16)%
Portfolio turnover rate (4)................ 2.87% 9.86% 17.92% 10.85% 24.34%
</Table>
See accompanying notes to financial highlights on page 56.
55
THE SELECT SECTOR SPDR TRUST
FINANCIAL HIGHLIGHTS
FOR A SELECT SECTOR SPDR OUTSTANDING THROUGHOUT EACH YEAR
<Table>
<Caption>
THE UTILITIES
SELECT SECTOR SPDR FUND
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
09/30/04 09/30/03 09/30/02 09/30/01 09/30/00
---------- ---------- -------- -------- --------
Net asset value, beginning of year............ $ 21.79 $ 18.57 $ 29.35 $ 32.24 $ 29.52
---------- ---------- -------- -------- --------
Net investment income (loss).................. 0.85(1) 0.81 0.89 0.70 1.06
Net realized and unrealized gain (loss) (2)... 3.33 3.16 (10.82) (2.48) 2.86
---------- ---------- -------- -------- --------
Total from investment operations.............. 4.18 3.97 (9.93) (1.78) 3.92
---------- ---------- -------- -------- --------
Undistributed net investment income included
in price of units issued and redeemed,
net......................................... (0.05) 0.06 0.06 0.04 (0.17)
---------- ---------- -------- -------- --------
Distributions to shareholders from:
Net investment income......................... (0.82) (0.81) (0.91) (0.90) (0.85)
Net realized gain (loss)...................... -- -- -- (0.25) (0.18)
---------- ---------- -------- -------- --------
Total distributions to shareholders........... (0.82) (0.81) (0.91) (1.15) (1.03)
---------- ---------- -------- -------- --------
Net assets value, end of year................. $ 25.10 $ 21.79 $ 18.57 $ 29.35 $ 32.24
========== ========== ======== ======== ========
Total return (3).............................. 19.13% 22.16% (34.15)% (5.53)% 13.21%
========== ========== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of year (in 000's)............ $1,270,116 $1,181,940 $139,244 $110,068 $108,011
Ratio of expenses to average net assets....... 0.27% 0.27% 0.27% 0.29% 0.40%
Ratio of expenses to average net assets before
waivers..................................... 0.30% 0.31% 0.30% 0.34% 0.50%
Ratio of net investment income (loss) to
average net assets.......................... 3.64% 4.02% 3.60% 2.87% 3.45%
Portfolio turnover rate (4)................... 9.67% 5.70% 56.89% 11.79% 44.57%
</Table>
(1) Per share numbers have been calculated using the average shares method,
which more appropriately presents the per share data for the period.
(2) The amounts shown at this caption for a share outstanding may not accord
with the change in aggregate gains and losses in securities for the fiscal
period because of the timing of sales and repurchases of Fund shares in
relation to fluctuating market values for the Fund.
(3) Total return is calculated assuming a purchase of shares at net asset value
per share on the first day and a sale at net asset value per share on the
last day of each period reported. Distributions are assumed for the purposes
of this calculation, to be reinvested at the net asset value per share on
the respective payment dates of each Fund. Total return for a period of less
than one year is not annualized. Broker commission charges are not included
in the calculation.
(4) Portfolio turnover rate excludes securities received or delivered from
processing creations or redemptions on Select Sector SPDRs.
56
THE SELECT SECTOR SPDR TRUST
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
1. ORGANIZATION
The Select Sector SPDR Trust (the "Trust") was organized in the Commonwealth of
Massachusetts on June 10, 1998 and is registered under the Investment Company
Act of 1940 (the "1940 Act"), as amended, as an open-end management investment
company. The Trust was created to provide investors with the opportunity to
purchase a security representing a proportionate undivided interest in a
portfolio of securities consisting of substantially all of the common stocks in
substantially the same weighting, in a particular sector or group of industries
as specified by a specified market sector index (each a "Select Sector Index").
Each of the nine Select Sector Indexes represents a basket of equity securities
of public companies that are components of the S&P 500 Index and are included in
a specific sector. The Trust is comprised of nine funds (collectively the
"Funds" and each individually a "Fund") as follows: The Consumer Discretionary
Select Sector SPDR Fund, The Consumer Staples Select Sector SPDR Fund, The
Energy Select Sector SPDR Fund, The Financial Select Sector SPDR Fund, The
Health Care Select Sector SPDR Fund, The Industrial Select Sector SPDR Fund, The
Materials Select Sector SPDR Fund, The Technology Select Sector SPDR Fund, and
The Utilities Select Sector SPDR Fund. Each Fund operates as a non-diversified
investment company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Trust in the preparation of its financial statements:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
SECURITY VALUATION
The Funds' securities holdings, except for those traded on the NASDAQ, are
valued based on the last sale price. Securities traded on the NASDAQ are valued
at the NASDAQ Official Close Price. Securities regularly traded in an
over-the-counter market are valued at the last sale price in such market. Other
portfolio securities and assets for which market quotations are not readily
available are valued based on fair value as determined in good faith by the
Trust's Pricing Committee in accordance with procedures adopted by the Board of
Trustees.
INVESTMENT INCOME
Dividend income is recorded on the ex-dividend date. Interest income is recorded
on the accrual basis. The value of additional securities received as dividend
payments is recorded as income and as an increase to the cost basis of such
securities.
EXPENSES
Expenses of the Trust, which are directly identifiable to a specific Fund, are
applied to that Fund. Expenses, which are not readily identifiable to a specific
Fund, are allocated in such a manner as deemed equitable, taking into
consideration the nature and type of expense and the relative net assets of the
Funds.
DISTRIBUTIONS
The Trust declares and distributes dividends from net investment income to its
shareholders quarterly. The Trust will distribute net realized capital gains, if
any, at least annually.
FEDERAL INCOME TAX
The Funds have qualified and intend to qualify for and elect treatment as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended. By so qualifying and electing, each Fund will not be
subject to federal income taxes to the extent it distributes its taxable income,
including any net realized capital gains, for each fiscal year. In addition, by
distributing during each calendar year substantially all of their net
57
THE SELECT SECTOR SPDR TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL INCOME TAX -- (CONTINUED)
investment income and capital gains, if any, the Funds will not be subject to
federal excise tax. Income and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These book-tax differences are primarily due to differing
treatments for income equalization, in-kind transactions and losses deferred due
to wash sales. At September 30, 2004, the Funds had the following capital loss
carryforwards, which may be utilized to offset any net realized capital gains,
expiring September 30:
<Table>
<Caption>
FUND 2008 2009 2010 2011 2012
- -----------------------------------------------------------------------------------------------------------------
Consumer Discretionary Select Sector SPDR
Fund $ 234,327 $ 718,060 $ 732,626 $ 13,927,450 $ 2,502,233
Consumer Staples Select Sector SPDR Fund 32,935 5,361,967 1,125,600 54,107,397 23,758,907
Energy Select Sector SPDR Fund 748,469 615,827 6,697,642 65,879,072 6,684,065
Financial Select Sector SPDR Fund 310,711 3,419,828 3,115,309 19,148,460 8,078,713
Health Care Select Sector SPDR Fund -- 1,393,723 2,876,921 17,808,907 1,306,855
Industrial Select Sector SPDR Fund -- 5,365,360 617,211 29,450,669 6,331,812
Materials Select Sector SPDR Fund -- 1,158,053 3,739,320 6,349,204 2,359,563
Technology Select Sector SPDR Fund 1,441,975 13,684,462 110,778,244 305,114,554 123,285,364
Utilities Select Sector SPDR Fund -- 2,084,663 419,927 20,355,853 15,559,181
</Table>
During the fiscal period ended September 30, 2004, the Funds reclassified
non-taxable security gains and losses realized in the in-kind redemption of
Creation Units (Note 4) as an increase or decrease to paid in surplus in the
Statements of Assets and Liabilities as follows:
<Table>
<Caption>
NET GAIN (LOSS)
FUND RECLASS AMOUNT
- -----------------------------------------------------------------------------
Consumer Discretionary Select Sector SPDR Fund $ 43,838,447
Consumer Staples Select Sector SPDR Fund 19,857,204
Energy Select Sector SPDR Fund 135,484,004
Financial Select Sector SPDR Fund 74,846,400
Health Care Select Sector SPDR Fund 28,514,464
Industrial Select Sector SPDR Fund 103,400,939
Materials Select Sector SPDR Fund 76,354,371
Technology Select Sector SPDR Fund 18,684,631
Utilities Select Sector SPDR Fund 197,480,055
</Table>
Under current tax laws, capital losses realized after October 31, may be
deferred and treated as occurring on the first day of the following fiscal year.
The Funds incurred the following losses during the period November 1, 2003
through September 30, 2004 and have been deferred for tax purposes until fiscal
year 2004:
<Table>
<Caption>
FUND DEFERRED LOSSES
- -----------------------------------------------------------------------------
Consumer Discretionary Select Sector SPDR Fund $ 997,052
Consumer Staples Select Sector SPDR Fund 799,804
Energy Select Sector SPDR Fund 5,976,535
Financial Select Sector SPDR Fund 3,541,847
Health Care Select Sector SPDR Fund 5,853,214
Industrial Select Sector SPDR Fund 1,389,592
Materials Select Sector SPDR Fund 1,807,615
Technology Select Sector SPDR Fund 7,887,018
Utilities Select Sector SPDR Fund --
</Table>
For the year ended September 30, 2004, there were no significant differences
between the book basis and the tax basis character of distributions to
shareholders. Additionally, there were no significant differences between the
book basis and tax basis components of net assets other than differences in the
net unrealized appreciation (depreciation) in value of investments attributable
to the tax deferral of losses on wash sales.
58
THE SELECT SECTOR SPDR TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL INCOME TAX -- (CONTINUED)
The tax character of distributions paid during the year ended September 30,
2004, was as follows:
<Table>
<Caption>
LONG-TERM
ORDINARY INCOME CAPITAL GAIN
- --------------------------------------------------------------------------------------------
Consumer Discretionary Select Sector SPDR Fund $ 1,857,385 $ --
Consumer Staples Select Sector SPDR Fund 7,556,211 --
Energy Select Sector SPDR Fund 16,759,030 --
Financial Select Sector SPDR Fund 18,056,916 --
Health Care Select Sector SPDR Fund 7,764,177 --
Industrial Select Sector SPDR Fund 7,800,750 --
Materials Select Sector SPDR Fund 11,929,682 --
Technology Select Sector SPDR Fund 7,553,916 --
Utilities Select Sector SPDR Fund 41,107,105 --
</Table>
The tax character of distributions paid during the year ended September 30,
2003, was as follows:
<Table>
<Caption>
LONG-TERM
ORDINARY INCOME CAPITAL GAIN
- --------------------------------------------------------------------------------------------
Consumer Discretionary Select Sector SPDR Fund $ 1,186,210 $ --
Consumer Staples Select Sector SPDR Fund 4,528,088 --
Energy Select Sector SPDR Fund 6,750,742 --
Financial Select Sector SPDR Fund 14,072,829 --
Health Care Select Sector SPDR Fund 2,961,960 --
Industrial Select Sector SPDR Fund 5,963,416 --
Materials Select Sector SPDR Fund 7,973,938 --
Technology Select Sector SPDR Fund 2,618,188 --
Utilities Select Sector SPDR Fund 33,590,987 --
</Table>
As of September 30, 2004 the components of distributable earnings (excluding
unrealized appreciation (depreciation)) on a tax basis were as follows:
<Table>
<Caption>
UNDISTRIBUTED
UNDISTRIBUTED LONG-TERM
ORDINARY INCOME CAPITAL GAIN
- ---------------------------------------------------------------------------------------------
Consumer Discretionary Select Sector SPDR Fund $ 248,157 $ --
Consumer Staples Select Sector SPDR Fund 2,000,980 --
Energy Select Sector SPDR Fund 3,936,428 --
Financial Select Sector SPDR Fund 3,384,262 --
Health Care Select Sector SPDR Fund 1,800,455 --
Industrial Select Sector SPDR Fund 2,705,097 --
Materials Select Sector SPDR Fund 3,097,237 --
Technology Select Sector SPDR Fund 4,521,180 --
Utilities Select Sector SPDR Fund 10,801,428 --
</Table>
INVESTMENT TRANSACTIONS
Investment transactions are recorded on the trade date. Realized gains and
losses from the sale or disposition of securities are recorded on the identified
cost basis. Corporate actions (including cash dividends) are recorded net of
nonreclaimable foreign tax withholdings on the ex-dividend date.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with commercial banks. In a
repurchase agreement, a Fund buys a security and the seller simultaneously
agrees to repurchase the security on a specified future date at an agreed-upon
price. The repurchase price reflects an agreed-upon interest rate during the
time the Fund's money is invested in the security. Because the security
constitutes collateral for the repurchase obligation, a repurchase agreement can
be
59
THE SELECT SECTOR SPDR TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
REPURCHASE AGREEMENTS -- (CONTINUED)
considered a collateralized loan. The Fund's risk is the ability of the seller
to pay the agreed-upon price on the maturity date. If the seller is unable to
make a timely repurchase, the Fund could experience delays in the receipt of
expected proceeds, suffer a loss in principal or current interest, or incur
costs in liquidating the collateral. At September 30, 2004 the Trust had no open
repurchase agreements.
OTHER
Each of the Select Sector SPDR Funds concentrates its investments in certain
industries, subjecting them to greater risk than funds that invest in a wider
range of industries.
3. FEES AND COMPENSATION PAID TO AFFILIATES AND OTHER PARTIES
ADVISOR FEES
Each Fund has entered into an Investment Advisory Agreement with SSgA Funds
Management, Inc. As compensation for the services rendered, facilities
furnished, and expenses borne by the Advisor, each Fund pays the Advisor a fee
accrued daily and paid monthly, at the annualized rate of 0.05% of average daily
net assets of each of the Funds.
TRUSTEES FEES
The Trust pays each independent Trustee an annual fee of $16,000 plus a per
meeting fee of $2,000 for scheduled quarterly meetings of the Board of Trustees
attended by the Trustee and $500 for each special telephone meeting, if
applicable. Independent Trustees who serve on the Trust's Audit Committee
("Committee Members") also receive $1,000 per committee meeting attended except
for the Chairman of the Committee who receives $1,500 per committee meeting
attended. The Trust also reimburses each Trustee for travel and other
out-of-pocket expenses incurred by him/her in connection with attending such
meetings.
UNITARY FEE
A "Unitary" Fee is paid by each Fund to State Street Bank for the
Administration, Custody and Transfer Agency services it provides to the Funds.
The unitary fee is calculated based upon the average daily net assets of the
Trust and allocated pro rata to each Select Sector SPDR Fund based upon the
relative net assets of each Fund. The unitary fee is equal to the greater of:
(a) a sliding scale fee calculated as follows: (i) 0.10% of average daily net
assets of the Trust up to the first $4.5 billion of net assets (such $4.5
billion to be increased by $500 million each time a new Select Sector SPDR Fund
is added): (ii) 0.08% of average daily net assets up to the next $4.5 billion of
net assets of the Trust (such $4.5 billion to be increased by $500 million each
time a new Select Sector SPDR Fund is added): and (iii) 0.06% of average daily
net assets on the remainder of net assets; or (b) a minimum annual fee of $3.15
million increased by $350,000 each time a new Select Sector SPDR Fund is added.
Pursuant to a voluntary fee waiver, State Street has agreed to reduce the
Unitary Fee from 0.10% for the first $500 million per Fund, 0.08% for the next
$500 million per Fund, and 0.06% thereafter of the average daily net assets to
0.07% for the first $500 million per Fund, 0.05% for the next $500 million per
Fund and 0.03% thereafter of average daily net assets and continue to waive the
minimum fee. The foregoing fee reduction and minimum fee waiver will remain in
effect for at least a twelve-month period ending January 31, 2005. There is no
assurance that the fee reductions will remain in effect for more than one year.
State Street has not entered into an agreement with the trust to recapture
waived fees
60
THE SELECT SECTOR SPDR TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
in subsequent periods. The waiver amounts for the Unitary Fee for the twelve
months ended September 30, 2004 were as follows:
<Table>
<Caption>
FUND WAIVER AMOUNT
- ----------------------------------------------------------------------------
Consumer Discretionary Select Sector SPDR Fund $ 73,652
Consumer Staples Select Sector SPDR Fund 121,514
Energy Select Sector SPDR Fund 286,715
Financial Select Sector SPDR Fund 256,405
Health Care Select Sector SPDR Fund 174,506
Industrial Select Sector SPDR Fund 160,411
Materials Select Sector SPDR Fund 191,062
Technology Select Sector SPDR Fund 350,176
Utilities Select Sector SPDR Fund 442,174
</Table>
DISTRIBUTOR
ALPS Distributors, Inc. (the "Distributor") serves as the distributor of the
shares of each Fund pursuant to a Distribution Plan and Agreement, pursuant to
Rule 12b-1 under the 1940 Act, between the Distributor and the Trust. The Rule
12b-1 Plan and Agreement provides for payment of a fee to the Distributor at an
annualized rate of 0.25% of the average daily net assets of each of the Funds.
Effective February 1, 2002, the Board of Trustees has limited each Fund's 12b-1
fee to 0.07% of its average daily net assets at least until February, 2005.
ADDITIONAL EXPENSES
Standard and Poor's ("S&P"), the American Stock Exchange LLC (the "AMEX"), and
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") have
entered into a license agreement with respect to each Select Sector SPDR Fund's
Select Sector Index. Pursuant to such license agreement, the Trust has entered
into a sub-license agreement which required that each Select Sector SPDR Fund
pay a one time fee to S&P of $5,000 (the "One Time Fee"). In addition, the Trust
will pay a sub-license fee per annum (i) to S&P equal to the greater of 0.03% of
the aggregate net assets of the Trust or $450,000 (the "Minimum Annual Fee"),
and (ii) to Merrill Lynch equal to 0.03% of the aggregate net assets of the
Trust. The Minimum Annual Fee (plus the One Time Fee) is payable in full to S&P
during the first year of the sub-license agreement six months from the date
after the first day of trading of any Select Sector SPDR Fund on the AMEX (the
"First Trading Day"). Thereafter, the Minimum Annual Fee is payable in full on
each anniversary of the First Trading Day. The fee to Merrill Lynch is payable
on a quarterly basis. Each Select Sector SPDR Fund will pay its proportionate
share of the annual sub-license fees based on the relative net assets of each
Fund.
4. SHAREHOLDER TRANSACTIONS IN SELECT SECTOR SPDR FUNDS WERE AS FOLLOWS FOR:
CONSUMER DISCRETIONARY SELECT SECTOR SPDR FUND
<Table>
<Caption>
YEAR ENDED
SEPTEMBER 30, 2004
SELECT SECTOR
SPDRS AMOUNT
------------- -------------
SPDRs sold 10,550,000 $ 320,924,807
Dividend reinvestment SPDRs
issued 288 8,929
SPDRs redeemed (10,700,000) (331,200,720)
Net income equalization -- 62,924
----------- -------------
Net decrease (149,712) $ (10,204,060)
=========== =============
</Table>
<Table>
<Caption>
YEAR ENDED
SEPTEMBER 30, 2003
SELECT SECTOR
SPDRS AMOUNT
------------- -------------
SPDRs sold 10,750,000 $ 268,530,218
Dividend reinvestment SPDRs
issued 3 78
SPDRs redeemed (7,450,000) (182,604,441)
Net income equalization -- (130,703)
---------- -------------
Net increase 3,300,003 $ 85,795,152
========== =============
</Table>
61
THE SELECT SECTOR SPDR TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CONSUMER STAPLES SELECT SECTOR FUND
<Table>
<Caption>
YEAR ENDED
SEPTEMBER 30, 2004
SELECT SECTOR
SPDRS AMOUNT
------------- -------------
SPDRs sold 24,200,000 $ 544,286,558
Dividend reinvestment SPDRs
issued 686 15,262
SPDRs redeemed (9,300,000) (206,279,193)
Net income equalization -- (498,036)
---------- -------------
Net increase 14,900,686 $ 337,524,591
========== =============
</Table>
<Table>
<Caption>
YEAR ENDED
SEPTEMBER 30, 2003
SELECT SECTOR
SPDRS AMOUNT
------------- ------------
SPDRs sold 6,700,000 $131,764,821
Dividend reinvestment SPDRs issued 139 2,746
SPDRs redeemed (3,450,000) (66,199,315)
Net income equalization -- (56,698)
---------- ------------
Net increase 3,250,139 $ 65,511,554
========== ============
</Table>
ENERGY SELECT SECTOR SPDR FUND
<Table>
<Caption>
YEAR ENDED
SEPTEMBER 30, 2004
SELECT SECTOR
SPDRS AMOUNT
------------- --------------
SPDRs sold 56,100,000 $1,657,340,364
Dividend reinvestment SPDRs
issued 1,650 50,125
SPDRs redeemed (30,800,000) (930,253,042)
Net income equalization -- (1,137,806)
----------- --------------
Net increase 25,301,650 $ 725,999,641
=========== ==============
</Table>
<Table>
<Caption>
YEAR ENDED
SEPTEMBER 30, 2003
SELECT SECTOR
SPDRS AMOUNT
------------- -------------
SPDRs sold 17,900,000 $ 403,998,243
Dividend reinvestment SPDRs
issued 149 3,337
SPDRs redeemed (12,750,000) (288,051,051)
Net income equalization -- 207,743
----------- -------------
Net increase 5,150,149 $ 116,158,272
=========== =============
</Table>
FINANCIAL SELECT SECTOR SPDR FUND
<Table>
<Caption>
YEAR ENDED
SEPTEMBER 30, 2004
SELECT SECTOR
SPDRS AMOUNT
------------- ---------------
SPDRs sold 103,000,000 $ 2,925,480,945
Dividend reinvestment SPDRs
issued 2,127 59,810
SPDRs redeemed (99,000,000) (2,799,905,168)
Net income equalization -- (621,404)
----------- ---------------
Net increase 4,002,127 $ 125,014,183
=========== ===============
</Table>
<Table>
<Caption>
YEAR ENDED
SEPTEMBER 30, 2003
SELECT SECTOR
SPDRS AMOUNT
------------- ---------------
SPDRs sold 90,100,000 $ 2,097,213,388
Dividend reinvestment SPDRs
issued 1,761 40,801
SPDRs redeemed (78,600,000) (1,855,132,996)
Net income equalization -- 87,185
----------- ---------------
Net increase 11,501,761 $ 242,208,378
=========== ===============
</Table>
HEALTH CARE SELECT SECTOR SPDR FUND
<Table>
<Caption>
YEAR ENDED
SEPTEMBER 30, 2004
SELECT SECTOR
SPDRS AMOUNT
------------- -------------
SPDRs sold 22,050,000 $ 664,650,442
Dividend reinvestment SPDRs
issued 865 25,571
SPDRs redeemed (5,300,000) (157,819,952)
Net income equalization -- (789,572)
---------- -------------
Net increase 16,750,865 $ 506,066,489
========== =============
</Table>
<Table>
<Caption>
YEAR ENDED
SEPTEMBER 30, 2003
SELECT SECTOR
SPDRS AMOUNT
------------- ------------
SPDRs sold 7,800,000 $214,015,123
Dividend reinvestment SPDRs issued 21 595
SPDRs redeemed (800,000) (21,685,165)
Net income equalization -- (293,336)
--------- ------------
Net increase 7,000,021 $192,037,217
========= ============
</Table>
62
THE SELECT SECTOR SPDR TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INDUSTRIAL SELECT SECTOR SPDR FUND
<Table>
<Caption>
YEAR ENDED
SEPTEMBER 30, 2004
SELECT SECTOR
SPDRS AMOUNT
------------- -------------
SPDRs sold 17,850,000 $ 485,538,006
Dividend reinvestment SPDRs
issued 527 14,171
SPDRs redeemed (22,350,000) (593,516,542)
Net income equalization -- 458,904
----------- -------------
Net decrease (4,499,473) $(107,505,461)
=========== =============
</Table>
<Table>
<Caption>
YEAR ENDED
SEPTEMBER 30, 2003
SELECT SECTOR
SPDRS AMOUNT
------------- -------------
SPDRs sold 26,300,000 $ 562,525,359
Dividend reinvestment SPDRs
issued 6 127
SPDRs redeemed (5,800,000) (137,301,478)
Net income equalization -- (883,874)
---------- -------------
Net increase 20,500,006 $ 424,340,134
========== =============
</Table>
MATERIALS SELECT SECTOR SPDR FUND
<Table>
<Caption>
YEAR ENDED
SEPTEMBER 30, 2004
SELECT SECTOR
SPDRS AMOUNT
------------- --------------
SPDRs sold 40,800,000 $1,037,403,227
Dividend reinvestment SPDRs
issued 3,139 80,364
SPDRs redeemed (37,300,000) (941,322,881)
Net income equalization -- 714,818
----------- --------------
Net increase 3,503,139 $ 96,875,528
=========== ==============
</Table>
<Table>
<Caption>
YEAR ENDED
SEPTEMBER 30, 2003
SELECT SECTOR
SPDRS AMOUNT
------------- -------------
SPDRs sold 20,800,000 $ 433,113,510
Dividend reinvestment SPDRs
issued 19 381
SPDRs redeemed (9,350,000) (198,131,516)
Net income equalization -- (1,033,882)
---------- -------------
Net increase 11,450,019 $ 233,948,493
========== =============
</Table>
TECHNOLOGY SELECT SECTOR SPDR FUND
<Table>
<Caption>
YEAR ENDED
SEPTEMBER 30, 2004
SELECT SECTOR
SPDRS AMOUNT
------------- -------------
SPDRs sold 13,350,000 $ 272,413,883
Dividend reinvestment SPDRs
issued 1,801 38,247
SPDRs redeemed (22,550,000) (450,421,191)
Net income equalization -- (689,027)
----------- -------------
Net decrease (9,198,199) $(178,658,088)
=========== =============
</Table>
<Table>
<Caption>
YEAR ENDED
SEPTEMBER 30, 2003
SELECT SECTOR
SPDRS AMOUNT
------------- -------------
SPDRs sold 18,350,000 $ 277,484,077
Dividend reinvestment SPDRs
issued 1,081 15,599
SPDRs redeemed (13,600,000) (219,699,935)
Net income equalization -- 615,928
----------- -------------
Net increase 4,751,081 $ 58,415,669
=========== =============
</Table>
UTILITIES SELECT SECTOR SPDR FUND
<Table>
<Caption>
YEAR ENDED
SEPTEMBER 30, 2004
SELECT SECTOR
SPDRS AMOUNT
------------- ---------------
SPDRs sold 41,300,000 $ 986,689,902
Dividend reinvestment SPDRs
issued 11,398 270,223
SPDRs redeemed (44,950,000) (1,071,976,268)
Net income equalization -- 2,300,994
----------- ---------------
Net decrease (3,638,602) $ (82,715,149)
=========== ===============
</Table>
<Table>
<Caption>
YEAR ENDED
SEPTEMBER 30, 2003
SELECT SECTOR
SPDRS AMOUNT
------------- --------------
SPDRs sold 52,300,000 $1,009,645,746
Dividend reinvestment SPDRs
issued 389 7,869
SPDRs redeemed (5,550,000) (114,226,321)
Net income equalization -- (3,172,171)
---------- --------------
Net increase 46,750,389 $ 892,255,123
========== ==============
</Table>
Except for under the Trust's dividend reinvestment plan, Select Sector SPDRs are
issued and redeemed by a Fund only in Creation Unit size aggregations of 50,000
Select Sector SPDRs. Such transactions are only permitted on an in-kind basis,
with a separate cash payment which is equivalent to the undistributed net
investment income per Select Sector SPDR (income equalization) and a balancing
cash component to equate the transaction to the net asset value per unit of the
Fund on the transaction date. Transaction fees at scheduled amounts ranging from
$1,000 to
63
THE SELECT SECTOR SPDR TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
$4,000 per Creation Unit are charged to those persons creating or redeeming
Creation Units. Transaction fees are received by the Transfer Agent and used to
offset the expense of processing orders.
5. AGGREGATE UNREALIZED APPRECIATION AND DEPRECIATION
The identified cost of investments in securities owned by each Fund for federal
income tax purposes, and their respective gross unrealized appreciation and
depreciation at September 30, 2004 were as follows:
<Table>
<Caption>
GROSS GROSS NET UNREALIZED
IDENTIFIED UNREALIZED UNREALIZED APPRECIATION
FUND COST APPRECIATION DEPRECIATION (DEPRECIATION)
- ---------------------------------------------------------------------------------------------------------------------
Consumer Discretionary Select Sector SPDR Fund $ 268,117,831 $ 7,636,741 $ 21,852,105 $ (14,215,364)
Consumer Staples Select Sector SPDR Fund 644,395,256 15,318,806 40,862,987 (25,544,181)
Energy Select Sector SPDR Fund 1,280,189,323 188,300,384 -- 188,300,384
Financial Select Sector SPDR Fund 1,061,939,961 11,694,224 73,835,749 (62,141,525)
Health Care Select Sector SPDR Fund 840,382,289 37,090,296 66,273,557 (29,183,261)
Industrial Select Sector SPDR Fund 561,775,285 29,973,510 10,431,458 19,542,052
Materials Select Sector SPDR Fund 648,226,067 28,733,460 15,249,230 13,484,230
Technology Select Sector SPDR Fund 1,489,248,587 22,633,547 575,272,107 (552,638,560)
Utilities Select Sector SPDR Fund 1,219,320,955 68,863,201 9,549,213 59,313,988
</Table>
6. INVESTMENT TRANSACTIONS
For the period ended September 30, 2004, the Trust had in-kind contributions and
in-kind redemptions as follows:
<Table>
<Caption>
FUND PURCHASES SALES
- ----------------------------------------------------------------------------------------------
Consumer Discretionary Select Sector SPDR Fund $ 314,340,063 $ 324,560,239
Consumer Staples Select Sector SPDR Fund 513,084,206 175,547,323
Energy Select Sector SPDR Fund 1,506,294,651 780,345,696
Financial Select Sector SPDR Fund 2,500,979,382 2,368,956,387
Health Care Select Sector SPDR Fund 663,633,053 157,591,607
Industrial Select Sector SPDR Fund 460,782,443 568,319,576
Materials Select Sector SPDR Fund 953,442,710 856,655,666
Technology Select Sector SPDR Fund 248,454,072 448,617,854
Utilities Select Sector SPDR Fund 899,035,616 974,917,166
</Table>
For the period ended September 30, 2004, the Trust had purchases and sales of
investment securities as follows:
<Table>
<Caption>
FUND PURCHASES SALES
- ------------------------------------------------------------------------------------------
Consumer Discretionary Select Sector SPDR Fund $ 7,263,700 $ 7,416,905
Consumer Staples Select Sector SPDR Fund 12,431,056 13,922,571
Energy Select Sector SPDR Fund 89,328,436 92,066,895
Financial Select Sector SPDR Fund 70,712,800 75,867,695
Health Care Select Sector SPDR Fund 42,945,033 43,482,302
Industrial Select Sector SPDR Fund 17,123,379 18,358,005
Materials Select Sector SPDR Fund 22,965,025 24,332,257
Technology Select Sector SPDR Fund 51,794,151 29,303,120
Utilities Select Sector SPDR Fund 118,322,443 132,123,675
</Table>
For the period ended September 30, 2004, there were brokerage commissions on
investment transactions paid to State Street Corporation as follows:
<Table>
<Caption>
FUND COMMISSIONS
- -------------------------------------------------------------------------
Consumer Discretionary Select Sector SPDR Fund $ 318
Consumer Staples Select Sector SPDR Fund 327
Energy Select Sector SPDR Fund --
Financial Select Sector SPDR Fund 68
Health Care Select Sector SPDR Fund 642
Industrial Select Sector SPDR Fund 3,420
Materials Select Sector SPDR Fund 6,693
Technology Select Sector SPDR Fund 5,298
Utilities Select Sector SPDR Fund 2,739
</Table>
64
THE SELECT SECTOR SPDR TRUST
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Trustees and Shareholders of The Select Sector SPDR Trust,
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of each of the nine funds (each a
"Fund") comprising The Select Sector SPDR Trust (the "Trust") at September 30,
2004, and the results of their operations, the changes in their net assets and
the financial highlights for the periods indicated, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at September 30, 2004 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 19, 2004
65
THE SELECT SECTOR SPDR TRUST
OTHER INFORMATION
SHAREHOLDER EXPENSE EXAMPLE (UNAUDITED)
As a shareholder of a Fund, you incur two types of costs: (1) transaction costs
which may include creation and redemption fees or brokerage charges and (2)
ongoing costs, including management fees, distribution (12b-1) fees,
administration, custodian and transfer agent fees and other Fund expenses. This
example is intended to help you understand your ongoing costs (in dollars) of
investing in a Fund and to compare these costs with the ongoing costs of
investing in other mutual funds. It is based on an investment of $1,000 invested
at April 1, 2004 and held for the six-months ended September 30, 2004.
ACTUAL EXPENSES
The first table below provides information about actual account values and
actual expenses. You may use the information in this table, together with the
amount you invested, to estimate the expenses that you incurred over the period.
Simply divide your account value by $1,000 (for example, an $8,600 account value
divided by $1,000 = 8.6), then multiply the result by the number in the first
table under the heading entitled "Expenses Paid During Period" to estimate the
expenses attributable to your investment during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second table below provides information about hypothetical account values
and hypothetical expenses based on a Fund's actual expense ratio and an assumed
rate of return of 5% per year before expenses, which is not a Fund's actual
return. Thus, you should not use the hypothetical account values and expenses to
estimate the actual ending account balance or your expenses for the period.
Rather, these figures are provided to enable you to compare the ongoing costs of
investing in a Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds. Shareholders are charged transaction fees at scheduled
amounts ranging from $1,000 to $4,000 per Creation Unit to those persons
creating or redeeming Creation Units. If you buy or sell Select Sector SPDR Fund
Shares in the secondary market, you will incur customary brokerage commissions
and charges.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transaction costs, which may include
creation and redemption fees or brokerage charges. Therefore, the second table
is useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if these
transaction costs were included, your costs would have been higher.
<Table>
<Caption>
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID
VALUE VALUE DURING PERIOD*
4/01/04 9/30/04 4/01/04 TO 9/30/04
----------------- -------------- ------------------
ACTUAL
The Consumer Discretionary Select Sector SPDR Fund $1,000 $ 984.29 $1.39
The Consumer Staples Select Sector SPDR Fund $1,000 $ 955.60 $1.32
The Energy Select Sector SPDR Fund $1,000 $1,202.29 $1.49
The Financial Select Sector SPDR Fund $1,000 $ 978.91 $1.34
The Health Care Select Sector SPDR Fund $1,000 $ 969.92 $1.33
The Industrial Select Sector SPDR Fund $1,000 $1,077.17 $1.45
The Materials Select Sector SPDR Fund $1,000 $1,061.35 $1.49
The Technology Select Sector SPDR Fund $1,000 $ 945.00 $1.36
The Utilities Select Sector SPDR Fund $1,000 $1,051.26 $1.49
HYPOTHETICAL
(ASSUMING A 5% RETURN BEFORE EXPENSES)
The Consumer Discretionary Select Sector SPDR Fund $1,000 $1,023.60 $1.42
The Consumer Staples Select Sector SPDR Fund $1,000 $1,023.65 $1.37
The Energy Select Sector SPDR Fund $1,000 $1,023.65 $1.37
The Financial Select Sector SPDR Fund $1,000 $1,023.65 $1.37
The Health Care Select Sector SPDR Fund $1,000 $1,023.65 $1.37
The Industrial Select Sector SPDR Fund $1,000 $1,023.60 $1.42
The Materials Select Sector SPDR Fund $1,000 $1,023.55 $1.47
The Technology Select Sector SPDR Fund $1,000 $1,023.60 $1.42
The Utilities Select Sector SPDR Fund $1,000 $1,023.55 $1.47
</Table>
* Expenses are equal to the Fund's annualized expense ratio of 0.28%, 0.27%,
0.27%, 0.27%, 0.27%, 0.28%, 0.29%, 0.28% and 0.29%, respectively, multiplied
by the average account value of the period, multiplied by 183/366.
66
THE SELECT SECTOR SPDR TRUST
OTHER INFORMATION (CONTINUED)
TAX INFORMATION (UNAUDITED)
For federal income tax purposes, the following information is furnished with
respect to the distributions of the Trust for its fiscal year ended September
30, 2004.
Percentage of distributions which qualify for the corporate dividends received
deduction:
<Table>
<Caption>
PERCENTAGE
----------
Consumer Discretionary Select Sector SPDR Fund 100.00%
Consumer Staples Select Sector SPDR Fund 100.00
Energy Select Sector SPDR Fund 100.00
Financial Select Sector SPDR Fund 99.62
Health Care Select Sector SPDR Fund 100.00
Industrials Select Sector SPDR Fund 100.00
Materials Select Sector SPDR Fund 100.00
Technology Select Sector SPDR Fund 100.00
Utilities Select Sector SPDR Fund 100.00
</Table>
For the fiscal year ended September 30, 2004 certain dividends paid by the Trust
may be designated as qualified dividend income and subject to a maximum tax rate
of 15%, as provided for by the Jobs and Growth Tax Relief Reconciliation Act of
2003. Complete information will be reported in conjunction with your 2004 Form
1099-DIV.
PROXY VOTING POLICIES
You may obtain a description of the Fund's proxy voting policies and procedure
without charge, upon request by contacting the Funds directly at 1-800-843-2639
(toll free), on the website of the Securities and Exchange Commission, at
www.sec.gov, or on the Fund's website at www.spdrindex.com. Information
regarding how the Funds voted proxies relating to portfolio securities during
the most recent 12-months period ended June 30 is also available without charge,
upon request by calling 1-800-843-2639 (toll free), on the website of the
Securities and Exchange Commission, at www.sec.gov, and on the Fund's website at
www.spdrindex.com.
QUARTERLY PORTFOLIO SCHEDULE
The Funds will file a complete schedule of portfolio holdings with the
Securities and Exchange Commission of the first and third quarters of each
fiscal year on Form N-Q commencing with the quarter ending December 31, 2004.
The Fund's Forms N-Q will be available on the Securities and Exchange
Commission's website at www.sec.gov and may be reviewed and copied at the
Securities and Exchange Commission's Public Reference Room in Washington DC.
Information on the operation of the Public Reference Room may be obtain by
calling 1-800-SEC-0330. The information on Form N-Q will be available upon
request, without charge, by calling 1-800-843-2639 (toll free), and on the Fund
website at www.spdrindex.com.
67
THE SELECT SECTOR SPDR TRUST
OTHER INFORMATION (CONTINUED)
OFFICERS AND TRUSTEES
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
IN FUND
TERM OF OFFICE COMPLEX
NAME, ADDRESS POSITION(S) AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY
AND DATE OF BIRTH WITH FUNDS OF TIME SERVED DURING PAST 5 YEARS TRUSTEE
- --------------------------- --------------- ------------------ --------------------------------------- -----------
George R. Gaspari Trustee, Unlimited, Financial Services Consultant (1996 to 9
P.O. Box 844 Chairman of the Elected: October present).
124 Island Drive Audit Committee 1998
Highland Lakes, NJ 07422
3/15/40
Ernest J. Scalberg Trustee, Member Unlimited, Associate Vice President for External 9
Monterey Institute of of the Audit Elected: October Programs and Dean of the Fisher
International Studies Committee 1998 Graduate School of International
425 Van Buren St. Business (2001 to present); Dean of the
Monterey, CA 93940 Graduate School of Business
5/18/45 Administration and Dean of Faculty of
the School of Business at Fordham
University (April 1994 to 2001);
Director, Adviser or Trustee to
numerous non-profit organizations (1974
to present).
R. Charles Tschampion Trustee; Member Unlimited, Managing Director of Investment 9
General Motors Investment of the Audit Elected: October Research and Managing Director of
Management Corp. Committee 1998 Defined Contribution Plans, General
767 Fifth Avenue Motors Asset Management Corporation
New York, New York 10153 (1994 to present); Board of Governors
4/15/46 of the Association for Investment
Management Research (Member, 1995 to
2001; Chair, 1999-2000); India Magnum
Fund (1994 to present); Trustee of
Lehigh University and Chair of the
Investment Sub-Committee for the Lehigh
University Endowment Fund (October 1998
to present).
Cheryl Burgermeister Trustee; Member Unlimited, Retired; Trustee and Treasurer of 9
9 Nansen Summit of the Audit Elected: October Portland Community College Foundation
Lake Oswego, OR 97035 Committee 1998 (2001 to present); Finance Committee
6/26/51 Member Portland Community College
Foundation (January 2001 to present);
Trustee Zero Gravity Internet Fund (May
2000 to November 2001); Director and
Chief Finance Officer of The Crabbe
Huson Group and Treasurer of the Crabbe
Huson Family of Funds (1987 to 1998);
Active CPA in Oregon.
Kathleen C. Cuocolo* Trustee, Unlimited, Executive Vice President, State Street 9
243 Catering Heights Chairman of the Elected: May 2001 Bank and Trust Company (March
Concord, MA 01742 Board 2000-2003); Senior Vice President
2/3/52 (1995-March 2000); Executive Operating
Group (1999-2003); CPA in
Massachusetts; Trustee, Boston College
School of Financial Advisory Board.
Agustin J. Fleites** Trustee Unlimited, Principal, State Street Global Advisors 20
SSgA Funds Elected: November (1987-present); Member SSgA Investment
Management, Inc. 2003 Committee (1994-present).
State Street Financial
Center
One Lincoln Street
Boston, MA 02111-2900
12/17/65
<Caption>
NAME, ADDRESS OTHER DIRECTORSHIPS
AND DATE OF BIRTH HELD BY TRUSTEE
- --------------------------- ----------------------
George R. Gaspari 0
P.O. Box 844
124 Island Drive
Highland Lakes, NJ 07422
3/15/40
Ernest J. Scalberg 0
Monterey Institute of
International Studies
425 Van Buren St.
Monterey, CA 93940
5/18/45
R. Charles Tschampion Director of the India
General Motors Investment Magnum Fund; Trustee
Management Corp. of Lehigh University
767 Fifth Avenue and Chair of the
New York, New York 10153 Investment
4/15/46 Sub-Committee for the
Lehigh University
Endowment Fund.
Cheryl Burgermeister Trustee and Treasurer
9 Nansen Summit of Portland Community
Lake Oswego, OR 97035 College Foundation;
6/26/51 Trustee and Audit
Committee Member of
E*Trade Funds
(February 2004 to
present).
Kathleen C. Cuocolo* 0
243 Catering Heights
Concord, MA 01742
2/3/52
Agustin J. Fleites** Chairman of Board,
SSgA Funds President, Principal
Management, Inc. Executive Officer, and
State Street Financial Chief Executive
Center Officer,
One Lincoln Street StreetTRACKS Series
Boston, MA 02111-2900 Trust and StreetTRACKS
12/17/65 Index Shares Funds;
Director, SSgA Cash
Management Fund,
Dublin, Ireland.
</Table>
68
THE SELECT SECTOR SPDR TRUST
OTHER INFORMATION (CONTINUED)
OFFICERS AND TRUSTEES
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
IN FUND
TERM OF OFFICE COMPLEX
NAME, ADDRESS POSITION(S) AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY
AND DATE OF BIRTH WITH FUNDS OF TIME SERVED DURING PAST 5 YEARS TRUSTEE
- --------------------------- --------------- ------------------ --------------------------------------- -----------
Donald A. Gignac President Unlimited, Senior Vice President, State Street N/A
State Street Bank and Elected: August Bank and Trust Company (2002-present).
Trust Company 2003 Vice President, State Street Bank and
2 Avenue de Lafayette Trust Company (1993-2002)
Boston, Massachusetts 02111
6/14/65
Michael P. Riley Treasurer Unlimited, Assistant Vice President, State Street N/A
State Street Bank and Elected: August Bank and Trust Company (2000-present);
Trust Company 2003 Assistant Secretary, Assistant
One Federal Street Director, State Street Bank and Trust
Boston, Massachusetts 02110 Company (1999- 2000).
3/22/69
Karen Gillogly Assistant Unlimited, Vice President, State Street Bank and N/A
State Street Bank and Treasurer Elected: August Trust Company (1999-present); Audit
Trust Company 2003 Senior Manager, Ernst & Young LLP
One Federal Street (1998).
Boston, Massachusetts 02110
9/3/66
Mary Moran Zeven Secretary Unlimited, Senior Vice President and Senior N/A
State Street Bank and Elected: November Managing Counsel, (2002-present) and
Trust Company 2001 Vice President and Associate Counsel,
One Federal Street (2000-2002), State Street Bank and
Boston, Massachusetts 02110 Trust Company; Vice President and
2/27/61 Counsel, PFPC, Inc. 1999 to 2000.
Peter A. Ambrosini, Esq. Chief Unlimited Chief Compliance and Risk Management N/A
SSgA Funds Compliance Elected: Officer, SSgA Funds Management, Inc.
Management, Inc. Officer May 2003 and State Street Global Advisors
State Street Financial (2001-present); Managing Director,
Center PricewaterhouseCoopers (1986-2001).
One Lincoln Street
Boston, MA 02111-2900
12/17/43
<Caption>
NAME, ADDRESS OTHER DIRECTORSHIPS
AND DATE OF BIRTH HELD BY TRUSTEE
- --------------------------- ----------------------
Donald A. Gignac N/A
State Street Bank and
Trust Company
2 Avenue de Lafayette
Boston, Massachusetts 02111
6/14/65
Michael P. Riley N/A
State Street Bank and
Trust Company
One Federal Street
Boston, Massachusetts 02110
3/22/69
Karen Gillogly N/A
State Street Bank and
Trust Company
One Federal Street
Boston, Massachusetts 02110
9/3/66
Mary Moran Zeven N/A
State Street Bank and
Trust Company
One Federal Street
Boston, Massachusetts 02110
2/27/61
Peter A. Ambrosini, Esq. N/A
SSgA Funds
Management, Inc.
State Street Financial
Center
One Lincoln Street
Boston, MA 02111-2900
12/17/43
</Table>
* Ms. Cuocolo is an "interested person" of the Trust, as defined in the 1940
Act, by virtue of her former position as officer of State Street Bank & Trust
Company, the parent company of the Adviser.
** Mr. Fleites is an "interested person" of the Trust, as defined in the 1940
Act, by virtue of his position as an officer of the Adviser.
69
[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
THE SELECT SECTOR SPDR TRUST ANNUAL REPORT
TRUSTEES
KATHLEEN C. CUOCOLO, CHAIRMAN
AGUSTIN J. FLEITES
CHERYL BURGERMEISTER
GEORGE R. GASPARI
ERNEST J. SCALBERG
R. CHARLES TSCHAMPION
OFFICERS
DONALD A. GIGNAC, PRESIDENT
MICHAEL P. RILEY, TREASURER
KAREN GILLOGLY, ASSISTANT TREASURER
MARY MORAN ZEVEN, SECRETARY
PETER AMBROSINI, CHIEF COMPLIANCE OFFICER
INVESTMENT MANAGER
SSGA FUNDS MANAGEMENT, INC.
ONE LINCOLN STREET
BOSTON, MASSACHUSETTS 02111
DISTRIBUTOR
ALPS DISTRIBUTORS, INC.
1625 BROADWAY, SUITE 2200
DENVER, COLORADO 80202
CUSTODIAN, ADMINISTRATOR AND TRANSFER AGENT
STATE STREET BANK AND TRUST COMPANY
225 FRANKLIN STREET
BOSTON, MASSACHUSETTS 02110
LEGAL COUNSEL
CLIFFORD CHANCE US LLP
31 WEST 52ND STREET
NEW YORK, NEW YORK 10019
INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
PRICEWATERHOUSECOOPERS LLP
125 HIGH STREET
BOSTON, MASSACHUSETTS 02110
The Select Sector SPDR Trust is distributed by ALPS Distributors, Inc.
The information contained in this report is intended for the general
information of shareholders of the Trust. This report is not authorized
for distribution to prospective investors unless preceded or accompanied
by a current Trust prospectus which contains important information
concerning the Trust. You may obtain a current prospectus from the
Distributor. Please read the prospectus carefully before you invest.
CATEGORICALLY UNIQUE
INDEX FUNDS(SM)
SELECT SECTOR
SPDRs(R)
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," "500,"
"Standard & Poor's Depositary Receipts(R)," "SPDR(R)," "Select Sector SPDR," and
"Select Sector Standard & Poor's Depositary Receipts" are trademarks of The
McGraw-Hill Companies, Inc. and have been licensed for use in connection with
the listing and trading of Select Sector SPDRs on the AMEX. The stocks included
in each Select Sector Index (upon which the Products are based) were selected by
the index compilation agent in consultation with S&P from the universe of
companies represented by the S&P 500 Index. The composition and weighting of
stocks included in each Select Sector Index can be expected to differ from the
composition and weighting of stocks included in any similar S&P 500 sector index
that is published and disseminated by S&P.
ITEM 2. CODE OF ETHICS
(a) The Select Sector SPDR Trust (the "Trust" or "Registrant") has adopted
a Code of Conduct for Principal Executive and Senior Financial Officers (the
"Code of Conduct").
(c) There has been an amendment to the Code of Conduct during the period of
April 1, 2004 through September 30, 2004 (the "Reporting Period"), to increase
the threshold for the receipt of any non-nominal gifts by covered persons from
$100 to $250.
(d) There have been no waivers granted by the Trust to individuals covered
by the Code of Conduct during the Reporting Period.
(f) A copy of the Code of Conduct is being filed as Exhibit 11(a)(1) to
this Form N-CSR.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT
(a)(1) The Board of Trustees of the Trust has determined that the Trust has
two Board members serving on the Trust's Audit Committee that possess the
attributes identified in Instructions 2(b) of Item 3 to Form N-CSR to qualify as
an "audit committee financial expert."
(2) George Gaspari and Cheryl Burgermeister are the Trust's audit committee
financial experts. The Board also determined that Mr. Gaspari and Ms.
Burgermeister are not "interested person(s)" of the Trust as that term is
defined in Section 2(a)(19) of the Investment Company Act.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(a) Audit Fees
For the fiscal years ending September 30, 2004 and September 30, 2003,
the aggregate audit fees billed for professional services rendered by
PricewaterhouseCoopers LLP ("PwC"), the Trust's principal accountant,
for the audit of the Trust's annual financial statements and services
provided by PwC in connection with the Trust's statutory and regulatory
filings were $157,500 and $150,300, respectively.
(b) Audit-Related Fees
For the fiscal years ending September 30, 2004 and September 30, 2003,
the aggregate billed fees for assurance and related services by PwC
reasonably related to the performance of the audit of the Trust's
financial statements that are not reported under (a) of this Item were
$0 and $0, respectively. The nature of such services were the: (1)
auditing of the statements of assets and liabilities, related
statements of operations and changes in net assets, and the financial
highlights of the Trust's operational series; (2) auditing and
reporting on the financial statements to be included in the amendment
to the Trust's registration statement on Form N-1A to be filed with the
Securities and Exchange
Commission; (3) review of the amendment to the registration statement;
and (4) issuance of a report on internal control for inclusion in the
Trust's Form N-SAR.
(c) Tax Fees
For the fiscal years ending September 30, 2004 and September 30, 2003,
the aggregate tax fees billed for professional services rendered by PwC
for tax compliance, tax advice, and tax planning were $59,400 and
$57,600, respectively. Services included the review of income and
excise tax returns for the Trust.
(d) All Other Fees
For the fiscal years ending September 30, 2004 and September 30, 2003,
the aggregate fees billed for professional services rendered by PwC for
products and services provided by PwC, other than the services reported
in (a) through (c) of this Item were $0 and $0, respectively.
(e)(1) Audit Committee Pre-Approval Policies and Procedures
The Trust's Audit Committee Charter states the following with respect
to pre-approval procedures:
Pre-Approval Requirements. Before the independent auditors are
engaged by the Trust to render audit or non-audit services,
either:
a. The Audit Committee shall pre-approve all auditing
services and permissible non-audit services (e.g.,
tax services) provided to the Trust. The Audit
Committee may delegate to one or more of its members
the authority to grant pre-approvals. Any decision of
any member to whom authority is delegated under this
section shall be presented to the full Audit
Committee at the next regularly scheduled meeting of
the Board of Trustees;
b. De Minimis Exceptions to Pre-Approval
Requirements. Pre-Approval for a service provided to
the Trust other than audit, review or attest services
is not required if: (1) the aggregate amount of all
such non-audit services provided to the Trust
constitutes not more than 5 percent of the total
amount of revenues paid by the Trust to the
independent auditors during the fiscal year in which
the non-audit services are provided; (2) such
services were not recognized by the Trust at the time
of the engagement to be non-audit services; and (3)
such services are promptly brought to the attention
of the Audit Committee and are approved by the Audit
Committee or by one or more members of the Audit
Committee to whom authority to grant such approvals
has been delegated by the Audit Committee prior to
the completion of the audit.
c. Pre-Approval of Non-Audit Services Provided to the
investment adviser and Certain Control Persons. The
Audit Committee shall pre-approve any non-audit
services proposed to be provided by the independent
auditors to (a) the investment adviser and (b) any
entity controlling, controlled by, or under common
control with the investment adviser that provides
ongoing services to the Trust, if the independent
auditors' engagement with the investment adviser or
any such control persons relates directly to the
operations and financial reporting of the Trust. It
shall be the responsibility of the independent
auditors to notify the Audit Committee of any
non-audit services that need to be pre-approved.
d. Application of De Minimis Exception: The De
Minimis exception set forth above applies to
pre-approvals under this Section as well, except that
the "total amount of revenues" calculation is based
on the total amount of revenues paid to the
independent auditors by the Trust and any other
entity that has its services approved under this
Section (i.e., the investment adviser or any control
person).
(e)(2) Percentages of Services
One hundred percent of the services described in each of paragraphs (b)
through (d) of this Item were approved by the Trust's Audit Committee
pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Not applicable.
(g) Total Fees Paid By Adviser and Certain Affiliates
For the fiscal years ending September 30, 2004 and September 30, 2003,
the aggregate non-audit fees billed by PwC for services rendered to the
Trust and SSgA Funds Management, Inc. (the "Adviser") and any entity
controlling, controlled by, or under common control with the Adviser
that provided ongoing services to the Trust were $2,904,000 and
$2,098,500, respectively.
(h) Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
The Trust has a separately designated Audit Committee established in accordance
with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. The
Trust's Audit Committee is comprised of the following members: George Gaspari
(Chairman), Cheryl Burgermeister, Ernest Scalberg and R. Charles Tschampion.
ITEM 6. SCHEDULE OF INVESTMENTS
Not required for this filing.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES
Not applicable to the Registrant.
ITEM 8. PURCHASE OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS
Not applicable to the Registrant.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no material changes to the procedures by which shareholders may
recommend nominees to the Registrant's Board of Trustees during the period
covered by this Form N-CSR filing.
ITEM 10. CONTROLS AND PROCEDURES
(a) Within 90 days of the filing date of this Form N-CSR, Donald A. Gignac, the
Registrant's President and Principal Executive Officer, and Michael P. Riley,
the Registrant's Treasurer and Principal Financial Officer, reviewed the
Registrant's disclosure controls and procedures (the "Procedures") and evaluated
their effectiveness. Based on the review, Messrs. Gignac and Riley determined
that the Procedures adequately ensure that information required to be disclosed
by the Registrant in its periodic reports is recorded, processed, summarized and
reported within the time periods required by the Securities and Exchange
Commission's rules and regulations.
(b) In the Registrant's second fiscal half-year, there were no significant
changes in the Registrant's internal controls or in other factors that have
materially affected, or are reasonably likely to materially affect, its controls
over financial reporting subsequent to the date of their evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
ITEM 11. EXHIBITS
(a)(1) The Trust's Code of Conduct for Principal Executive and Senior
Financial Officers.
(a)(2) The certifications required by Rule 30a-2 of the Investment Company Act
of 1940, as amended (the "1940 Act"), is attached hereto.
(b) The certification required by Rule 30a-2(b) of the 1940 Act and
Sections 906 of the Sarbanes-Oxley Act of 2002 is attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SELECT SECTOR SDPR(R)TRUST
By: /s/ Donald A. Gignac
-------------------------------------
Donald A. Gignac
President and Principal Executive Officer
Date: December 1, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Donald A. Gignac
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Donald A. Gignac
President and Principal Executive Officer
Date: December 1, 2004
By: /s/ Michael P. Riley
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Michael P. Riley
Treasurer and Principal Financial Officer
Date: December 1, 2004