MIRRORING THE INDEXES; `Q' STOCK IS LATEST WRINKLE IN HUGELY POPULAR INDEX INVESTING.

Byline: Deborah Adamson Daily News Staff Writer

You've got spiders, webs and diamonds. The ``Q'' will be showing up on investor radar screens as early as this week.

It's the ticker symbol for a new security, tentatively named Nasdaq 100 shares, that will track - what else? - the Nasdaq 100 Index. It is pegged to the largest 100 U.S. companies (except financial firms) and foreign businesses whose shares trade on the Nasdaq National Market.

The ``Q'' is an index-linked security. Its creator, the American Stock Exchange, already has 30 similar stocks in its inventory. The exchange is so gung-ho about their popularity that it plans to create more.

``This has been the most successful part of our business in the last few years,'' said Dan Noonan, spokesman for the New York-based exchange.

The ``Q'' works like a hybrid stock and index fund. Like a stock, it will trade on exchanges at prices that change daily. Investors can buy and sell during trading hours. But unlike individual shares, it reflects a basket of stocks in a particular index. Where the index goes, so would the ``Q.''

Amex's other index-pegged securities include SPDRs (pronounced spiders), or Standard & Poor's Depositary Receipts, which track the S&P 500. Its World Equity Benchmark Shares, or WEBS, follow foreign indexes; Diamonds reflect the Dow Jones industrial average.

Amex's 30 index-linked securities, excluding ``Q,'' altogether traded 9.3 million shares in daily volume last year - a third of the exchange's total.

The magic word behind these securities is index. Forget tech stocks; index investing is the top sport on Wall Street.

Since the S&P 500 has been returning an average of 23 percent a year in the last five years, according to Standard & Poor's in New York, investors have been keen on index-linked securities.

The most common is the index mutual fund, which buys companies that comprise a particular index. For example, an index fund that tracks the S&P 500 would buy shares in all the companies of the index. If the index goes up or down, the fund would follow suit. Once the index makes a change, so would the fund.

Investors are flocking to the 247 index funds available today for two reasons: It beats nine out of 10 mutual funds and the cost is low.

In the five years ending November 1998, only 14 diversified equity funds have beaten the S&P 500's annual return of 23 percent, the rating agency said.

Funds that don't track an index, or actively-managed funds, average about 1 percent a year in expenses that customers pay, said Russell Kinnel, head of equity fund research at Morningstar, a mutual fund rating agency in Chicago. Index funds charge about 0.2 percent.

An index fund is cheaper to operate because a computer buys and sells according to changes in the index. In an actively-managed fund, the fund manager has to research and track his or her securities. Those trades - plus the investment in personnel and computers to make those picks - costs money.

The performance gap between large-cap index funds and actively-managed blue chip funds is wider than for midcaps and small-caps, Kinnel said.

That's because the expertise of the fund manager can make a bigger difference in midcap and small-cap stocks since they are less widely followed than the large-caps.

Vanguard Group, the second-largest mutual fund company in the nation after Fidelity Investments, is the father of index funds.

It started the first one, Vanguard Index 500, in 1976. Chairman John Bogle based the fund on academic studies about efficient markets.

Today, Vanguard has 29 index funds, far and away the most in the mutual fund industry. Together, they have $160 billion in assets out of a $450 billion total for the Valley Forge, Pa., company.

At $78 billion, Vanguard Index 500 is the largest index mutual fund open to small investors and the second-largest mutual fund overall, trailing only Fidelity's Magellan fund, which stands at $88 billion. (The largest index mutual fund is run by Bankers Trust, but it's only open to institutions.)

The popularity of index funds has given rise to a variety of products - Vanguard offers several bond index funds and even a balanced fund, which is 60 percent stock index, 40 percent bond index fund.

An index fund's lower expenses is especially crucial for bond funds, since the investments are more homogenous than stocks, said Vanguard spokesman John Worth. Investors whose bond funds are yielding 5 percent are better off in an index fund with 0.2 percent in expenses than an actively-managed fund with 1 percent in annual costs, he said.

Last year, Vanguard added three new index funds: Two small-cap funds and one mid-cap mutual fund.

Fidelity Investments in Boston added three new index funds a year ago: The Spartan Total Market, Spartan Extended Market and Spartan International Index.

They track the Wilshire 5000 Index, which is comprised of the entire stock market universe, the Wilshire 4500 (which excludes the companies in the S&P 500) and the Morgan Stanley Europe, Australia, New Zealand, and Far East indexes, respectively.

Spokeswoman Jessica Johnson said that while Fidelity is known more for its actively-managed funds, the company introduced index funds because of demand.

Investors would do well to consider owning an index fund as their core mutual fund, Kinnel said. They can supplement these with sector index funds.

As for choosing between an index fund and an index-linked security, he said that the security would have an added layer of costs such as commission. It's an expense that index fund shareholders would avoid.

``Most people are better off with an index fund,'' Kinnel said.

CAPTION(S):

Chart, Drawing

CHART: EXPLOSIVE GROWTH

The number of funds offered to individual investors has skyrocketed in just a decade.

Source: Morningstar

DRAWING: no caption (A mirror)