From the April 2008 issue of Research Magazine • Subscribe!

April 1, 2008

Substituting Stocks with ETFs

For investors sitting on big-time stock losses, now might be a good time for a spring cleaning.

In the past year, Washington Mutual (WM) has lost more than 70 percent in value, Office Depot (ODP) more than 60 percent, MGIC Investment (MTG) more than 60 percent, Freddie Mac (FRE) more than 45 percent, and Level 3 Communications (LVLT) more than 44 percent.

Market losses this dramatic are devastating both financially and emotionally.

Some of these losers may take years to get back on track, if ever. In the meantime, how about turning some of your lemons into lemonade?

For example, stock losers can be substituted with broader and more diversified exchange-traded funds (ETFs). Instead of trying to handpick technology stocks, try selecting a basket of technology companies, like the Select Sector Technology SPDRs (XLK), iShares Dow Jones U.S. Technology Sector Index Fund (IYW), or the Vanguard Information Technology ETF (VGT).

Making this kind of move can help to reduce financial risk and limit the potential of even greater future losses. While individual companies can go belly up, legitimate industry sectors generally survive.

Here's a short list of ETF substitutes for the stocks mentioned above: FRE - XLF; ODP - XLY; LVLT - VOX; and WM - XLF or KBE.

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Ron DeLegge is the San Diego-based editor of www.etfguide.com.

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