Index Stocks Provide Faster Action Than Mutual Funds.

As readers know, I'm a longtime booster of index mutual funds. These funds follow the market as a whole.

Tons of research has shown that most money managers don't beat the markets they invest in, after costs. Maybe your own stocks or funds have excelled in the past couple of years. But in most cases, you've also been taking extra risk. The odds of superior performance are against you, in the long run. Indexing puts the odds on your side.

Today, however, there's more than one way of indexing. You no longer have to buy mutual funds to track the market. You can buy index stocks.

These stocks are called SPDRs, or Spiders, which is short for Standard & Poor's Depositary Receipts. Each Spider tracks the performance of a particular market.

The original Spider, the daddy longlegs, mimics the performance of Standard & Poor's index of 500 leading stocks. When you buy the index-500 Spider, you're buying this entire market, in a single share.

For investors, what's the difference between tracking the S&P 500 in an index share, as opposed to an index mutual fund? Five key things:

* Buying. Spiders are bought through brokerage firms -- a full-service broker or your own online account. A round lot (100 shares) would cost around $14,600 at recent prices. Index mutual funds, by contrast, are bought directly from the fund itself. Minimum investment: $2,500 to $3,000.

* Pricing. A Spider's market price fluctuates all day, just like that of any other stock. Meanwhile, mutual funds are priced once a day, at 4 p.m. You buy or sell at that end-of-day price.

* Trading. You can buy and sell Spiders at any time of day, at the current market price. But not mutual funds. They cannot be traded fast.

* Playing. You can toy around with Spiders, just as you can with any other stocks. You can sell them short, write options against them and place limit orders. Not so for mutual funds.

* Paying. The cost recently dropped on the Spider that tracks the S&P 500. It's now 0.12 percent a year for the next two years (down from 0.18 percent). You also pay brokerage commissions. Finally, every trade costs you a "spread" (that's the difference between your buying price and your selling price, on the exchange).

By comparison, you'd pay 0.18 percent for the Vanguard or USAA index 500 funds, and 0.35 percent for the Schwab 500, with no spreads or commissions.

The S&P 500 Spider is only one of many new index stocks. There are nine sector Spiders that focus on portions of the S&P index, such as energy or technology; a Spider for midsize companies; Diamonds, which track the Dow Jones Industrial Average; Qubes, which track the Nasdaq index of 100 top stocks; and 17 Webs that track various foreign markets (Japan is the most popular now).

Barclays Global Investors, which manages the Webs, will soon launch as many as 47 new index stocks, mirroring various small-, midsize-and big-stock indexes, as well as particular industries such as health care and the Internet. State Street Global Advisors, which manages Spiders, plans to launch another nine of them.

So where does that leave you? If you want to track the market, should you be a Spider investor or a mutual fund investor? It's a close call.

If you're a long-term investor, you might feel more comfortable with a mutual fund.

In theory, investors could build a permanent portfolio of the new index stocks, "But then there's a risk that you'll give in to emotional trading, rather than staying put," says planner Rich Rysiewski of Shelby Township, Mich.

Regarding the price you have to pay, a low-cost fund group like Vanguard is competitive with index stocks. You'll definitely want a fund if you're making regular monthly investments. Paying monthly commissions for index stocks would eat you up.

On the other hand, index stocks for foreign countries (Webs) or industry sectors may be cheaper than the corresponding funds.

Index stocks will also appeal to timers and traders trying to beat the pros, and to people who want to gamble on certain industry sectors.

Index stocks should greatly expand the market for indexing in general, especially among the brokers and planners who charge sales commissions, says Lee Kranefuss, CEO of Barclays' individual investor business. They can now introduce you to indexing and still earn money on the sale.

You and I are the winners, in this ongoing indexing revolution. We're getting more efficient investment products, at a lower cost.

Safety of Stocks Is a Matter of Definition

Hold stocks for the long term. They'll always do better than bonds or cash. In the long run, stocks are safe.

That's dogma, in today's Church of Wealth. But allow me to disagree. As a challenger, I want to know what you mean by "stocks," what the "long term" is and what you think is "safe."

Historically, the market clearly favors stocks. Over 65 10-year periods since 1926, Standard & Poor's 500-stock average lost money only twice, and those were in decades around the Crash of 1929. Over 60 15-year periods, stocks made money every time, according to Ibbotson Associates in Chicago.

But you have to weigh these facts against a couple of caveats. First, they assume that you reinvest all dividends.

Also, the performance data isn't adjusted for inflation. After inflation, stock investors lost money in seven of the 65 10-year periods studied.

This brings me back to whether stocks are safe enough, if held for the long term.

First, what do you mean by "stocks?" Yes, the market usually does well over 15-year holding periods. But that measures the S&P index of 500 leading stocks. You get different results when you own a small collection of individual stocks.

This brings me to the next question, what do you mean by "long term?" If you sell when prices drop far enough to scare you, then buy when they've risen enough for you to be reassured, it's pointless to talk about the market's successful long-term record. You're not going to get it cause you didn't stick long-term.

Now the final question -- what do you mean by "safe?" The longer you hold well-diversified stocks, the smaller the risk that your portfolio will lose money.

If you hit one of those rare runs of bad luck, however, your loss could he large. In this sense, stocks are risky river the long run, as well as over the short run.