An Offbeat Way to Bet on Blue Chips

Most market seers, including Kiplinger's, predict that shares of large-company stocks will seize the spotlight this year from small-company shares, which have hogged the limelight since 2000. If you agree, you may want to consider an unusual exchange-traded invest-ment known as a structured note.

Structured notes are like cats that bark. They're bonds. But instead of paying interest, structured notes base their returns on the performance of certain benchmarks.

With the Index Lasers note, brought to market by a Citigroup unit, you root for Goliath to pulverize David. The note (symbol ICZ) will pay investors based on the performance gap between Standard & Poor's 100 index, a group of humongous stocks, and the S&P SmallCap 600, a collection of small fries, from September 25, 2006, to January 8, 2008. If the 100 trumps the 600 over that period, the notes, which have a face value of $10 per share, will return 125% of the difference in the gain. For example, if the S&P 100 beats the S&P 600 by 20 percentage points, the note will be worth $12.50 at maturity.

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Should both indexes decline, the note will gain as long as the S&P 100 declines less than the S&P 600. And if the small-stock index beats the blue-chip index by less than 15 percentage points, the shares will still be worth $10 at maturity. But should the S&P 600 index thrash the S&P 100 by more than 15 percentage points, investors will lose money.

Here is perhaps the scariest outcome: If the S&P 100 returns, say, 35% over the 15-month period and the S&P 600 returns 30%, you'll get only about a 6% return. Remember, it's the difference between the performance of the two indexes that determines what you gain or lose -- not the actual returns.

Index Lasers give blue-chip bulls a defensive play, says Marc Gerstein, a researcher at fund-data gatherer Lipper who owns shares. Still, even if you're high on blue chips for 2007, think of a Laser as you would a bond, not a stock.