I owned some S&P 500 Index Shares (SPY/"Spiders) at one time and wasn't aware of the feature mentioned by Wayne that would apparently allow an owner of SPY shares to convert them to the stock of the 500 underlying companies. A little rough estimating indicates that it would indeed require a huge investment in SPY shares to do this.
Say that the average price per share of the 500 companies in the S&P 500 Index is $30. So, to purchase a round lot of 100 shares of each of these companies would cost on the order of $1.5 million. SPY shares currently trade at about $109, so a person would have to own quite a few shares before conversion became practical.
This does not mean, however, that a conversion provision is worthless. The fact that very large investors could and would convert if a large discount to the net asset value developed, would prevent that from happening.
One way to "play" covered index arbitrage is this. Typically, the price of stock index futures is at a premium to the current value of the index. So you buy, say, 1,000 shares of SPY selling at $109 (cost = $109,000), and enter into a futures contract to sell $100 times the S&P Index, 6 months from now, at a value of, say, 1,150 (as determined by the market for futures contracts). In other words, you are contracting to sell your claim on $100 times the value of the S&P Index -- whatever the index value may actually be 6 months from now -- for $100 x 1,150 = $115,000. Thus, for an investment of $109,000, you have guaranteed yourself a profit of $6,000 in six months, representing a guaranteed annualized return of about 11% on your investment (not counting transaction costs).
Unfortunately (from the standpoint of people searching for a free lunch) and fortunately (from the standpoint of economists interested in maximizing the benefits to society as a whole) market efficiency has now made the premium on stock index futures so low that covered index arbitrage pays about as much return as an investment in Treasury Bills. In summary, my advice to small investors is to not mess with it.