WGN-TV Show Notes — January 15, 2002

ANCHOR: EXPERTS SAY TO BE FULLY DIVERSIFIED, YOU SHOULD OWN THE STOCKS OF AT LEAST 30 DIFFERENT COMPANIES, WITH NO MORE THAN 10 PERCENT OF YOUR ASSETS INVESTED IN ANY SINGLE STOCK.

ANCHOR: BUT IT’S EXPENSIVE TO BUY A LITTLE BIT OF SO MANY DIFFERENT COMPANIES. IN THIS WEEK’S REPORT, MONEY AND REAL ESTATE EXPERT ILYCE GLINK SHOWS YOU WHY EXCHANGE TRADED FUNDS MIGHT BE THE ANSWER YOU’RE LOOKING FOR.

ILYCE: WALMART, EXXON-MOBILE, MICROSOFT… IT’S AN OLD STORY. TOO MANY COMPANIES AND NOT ENOUGH CASH TO BUY ALL OF THEM. YOU COULD BUY AN INDEX FUND. IT’S CHEAP TO OWN, BUT YOU CAN ONLY BUY OR SELL IT ONCE A DAY. BUT HOW ABOUT AN EXCHANGE TRADED FUND? ALSO KNOWN AS AN ETF, IT ACTS MORE LIKE STOCK THAN A MUTUAL FUND. YOU CAN BUY AND SELL IT ALL DAY LONG, SELL IT SHORT, BUY ON MARGIN, TAKE A FEW SHARES OR A WHOLE BLOCK. AND THEY’VE GOT GREAT NAMES — SPIDERS AND DIAMONDS AND CUBES.

Alan Papier, Mutual Funds Analyst, Morningstar: A Spider is an ETF that tracks the S&P 500 index. The Nasdaq 100, that is the top 100 stocks traded on the Nasdaq exchange, that goes by the ticker Qubes, or QQQ. And the Diamonds which track the Dow Jones Industrial Average, which is made up of 30 very large US companies.

ILYCE: MOST EXCHANGE TRADED FUNDS CHARGE LOWER EXPENSES THAN EVEN THE LEAST COSTLY INDEX MUTUAL FUND. BUT YOU’LL PAY A COMMISSION EVERY TIME YOU BUY OR SELL.

Alan Papier, Mutual Funds Analyst, Morningstar: So on $10,000, we’re talking about a difference of $8 a year. So over long periods of time, given the virtues of economic compounding, those small differences can add up.

ILYCE: ONE OF THE BIG REASONS TO OWN AN ETF IS THAT YOU CAN INVEST IN BASKETS OF COMPANIES THAT MIGHT OTHERWISE BE OUT OF REACH. FOR EXAMPLE, IF YOU WANTED TO INVEST IN THE BIGGEST 100 COMPANIES ON NASDAQ, YOUR CHOICES ARE THE CUBES, OR ONE OF THE RYDEX FUNDS.

Alan Papier, Mutual Funds Analyst, Morningstar: Rydex OTC has a $25,000 minimum investment to access. For the everyday investor, they might not have that much money to get in. With an ETF, the Cubes for instance, an investor can buy in blocks of less than 100 shares, or odd lots, and can really buy at any increment in which they have the money to invest.

ILYCE: BUT BEFORE YOU RUSH OUT AND BUY A SLICE OF EACH OF THE BIGGEST ETFS, THINK DIVERSIFICATION. THE SPIDERS AND DIAMONDS CONTAIN MANY OF THE THE SAME COMPANIES, AND THERE’S EVEN SOME OVERLAP WITH THE CUBES. A BETTER IDEA IS TO FIGURE OUT WHAT YOU WANT TO BUY AND THEN FIGURE OUT WHICH EXCHANGE TRADED FUND BEST MEETS YOU NEEDS. BUT AS THE EXPERTS SAY, PAST PERFORMANCE IS NO GUARANTEE YOU’LL MAKE A BUNDLE IN THE STOCK MARKET THIS YEAR.

Alan Papier, Mutual Funds Analyst, Morningstar: The biggest warnings that investors need to be comfortable with both with an ETF of a regular mutual fund or a stock is the potential for capital loss. Markets move up and down and ETFs will potentially lose money just like a stock or mutual fund can.

ILYCE: BE SURE TO DO ALL OF YOUR HOMEWORK BEFORE BUYING AN EXCHANGE TRADED FUND. MAKE SURE YOU KNOW WHICH COMPANIES ARE INCLUDED IN THE FUND, HOW MUCH IT COSTS, AND WHETHER THE FUND DISTRIBUTES CAPITAL GAINS TO ITS SHAREHOLDERS. SOME GOOD SITES TO CHECK INCLUDE MORNINGSTAR.COM AND BLOOMBERG.COM.

Jan. 15, 2002.