Thursday, April 1, 1999

Q. I recently left a company and need to rollover my 401(k) funds into an IRA. I am 36 years old and have a very high tolerance for risk. My current retirement assets are committed to Vanguard Index 500, Vanguard Windsor II, and American Century Growth. I am looking for an index fund (read low expense ratio) that approaches the NASDAQ Technology Index to invest a large portion of the rollover funds.

Is there such an animal? Can you recommend a portfolio mix?

—B.W., Plano, TX

A. You can't find exactly what you are looking for at this moment but you can get close. In addition, the American Stock Exchange is expanding its offerings of index trusts so rapidly that I would not be surprised if an EXACT copy of what you are looking becomes available in the near future.

You can now buy a low cost index trust that duplicates the Dow Jones Industrial Average (DIAMONDS), the Standard and Poors 500 Index (SPYDERS), and indices for markets in foreign countries (WEBS). More recently, the exchange has gone a step further and subdivided the S&P 500 stocks into sectors. The sectors include Basic Industry, Consumer Services, Consumer Staples, Cyclicals and Transportation, Energy, Financial, Industrial, Technology, and Utilities. In addition, you can also buy units that invest in the NASDAQ 100 Index (ticker QQQ).

And that's what I mean by close, but not quite.

The NASDAQ 100 Index is comprised of the 100 largest capitalization companies listed on NASDAQ. While it is very heavy with technology companies— Microsoft, Intel, and Dell, for instance— it also includes some non-technology companies like Bed, Bath, and Beyond.

The SPDR Technology unit (ticker XLK), however, is a pure technology index and holds shares in 82 technology companies included in the S&P 500 Index. Microsoft, for instance, accounts for 14.07 percent of the index while the smallest, Data General, accounts for only 0.05 percent. There is a significant overlap in the holdings of the two trusts since many stocks in the NASDAQ 100 are also technology stocks included in the S&P 500 Index. You can get all the particulars on any of the trusts by going to the Amex website, www.amex.com.

These new investment units offer the low expenses of an index fund with the continuous pricing and open market trading of individual stocks. They can also be purchased on margin, sold short, and purchased through a discount broker. As a result, it is now possible to establish a basic position in large cap stocks the full index SPDR (ticker SPY) and then "overweight" your portfolio with additional holdings in sector SPDRs. In your case, for instance, you would buy SPY (the entire index) and XLK (the technology index).

Q. During the recent slide of stocks on Wall Street I kept reading that investors had dumped falling stocks and gone into mutual funds and bonds as some sort of haven. I can understand mutual funds, some return upwards of 20 percent annually. But why bonds? Don't most pay around five to six percent? And don't you have to hold them for full term, which seems to be anywhere from five to thirty years? And aren't there pretty large fees involved in switching back and forth?

—S.S., by e-mail (AOL.com)

A. You've got just enough information there to be really dangerous to yourself. The annual return on common stocks has two parts, dividends and capital gains. Dividends, these days, are very small, averaging just over 1 percent. Capital gains may, or may not, occur. While lots of funds have been providing "upwards" of 20 percent a year return in recent years, gains are NOT a sure thing.

Bond yields are in the 5 to 6 percent range so it could be argued that they are providing a cash return that is about 4 TIMES the dividend yield of common stocks. So if you think stocks are heading for a decline, you can switch some money to bonds, avoid the stock decline, and get well paid while you are waiting to buy again. It's all a matter of picking horses.

Some investors create an arbitrary mix of stocks and bonds as a defacto tool for moving out of stocks as prices rise. To be sure, it's not a perfect tool for market timing but it's better than the vast majority of the predictions offered.