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Dear Dagen: When Will I Be Able to Invest in an Internet Index Fund?

Several are getting ready to launch, though it remains to be seen whether index funds are the right vehicle for this sector.

Is there an index fund to play the Internet or a SPDR (SPY) - Get SPDR S&P 500 ETF Trust Report for Net stocks? -- Lawrence Rosof

Lawrence,

Sometimes it seems there are more Internet indices than there are companies. Consider:

TheStreet.com Internet Sector

index, the

ISDEX

, the

Inter@ctive Week Internet

index and the

Dow Jones Internet

index, to name a few.

For now, you can watch them bounce around like spaldeens. No one has yet launched an actual mutual fund based on any of them. But like all things Internet-related, one is probably coming soon.

The first index fund could be one based on the ISDEX, a 50-stock index started in April 1996. British investment firm

Investec Guinness Flight

is negotiating to license the index from

internet.com

(INTM)

, a network of Internet sites that went public last week. At one point, money manager

Reich & Tang

also was jockeying for the right to use the ISDEX as the basis for an index fund, but that firm has dropped out of the competition.

However, Guinness Flight is not yet the clear-cut victor. "We are very strongly interested in

Guinness Flight, and they are certainly the front-runner," says Alan Meckler, chairman and chief executive officer of internet.com. But there is still competition for the rights to the index, and the company will probably make a decision before the end of this week, Meckler adds.

Investec Guinness Flight, which manages several other funds, including the Internet-flavored

(GFWIX)

Wired Index fund, is ready for a launch if and when it gets the all-clear on the ISDEX. (You can read more about this index at

internet.com. Also see our previous

story on the Wired Index.) The firm has already filed a prospectus with the

Securities and Exchange Commission

. And Jim Atkinson, director at Guinness Flight in Pasadena, Calif., says it would take less than two weeks to launch the fund.

Other Internet index funds are on deck. When

Barclays Global Investors

TheStreet Recommends

launches its numerous

exchange-traded index products next year on the

American Stock Exchange

, one will track the Dow Jones Internet index. And

E*Trade

(EGRP)

has said it is considering an Internet index fund.

I had heard about two other Internet index funds in registration, but getting any information on them was like finding pickled pigs' feet at a New York deli.

Internet 100 Advisors

, an investment advisory firm in Arlington, Va., had filed to launch two funds to track the firm's own Internet 100 index, according to a story on the

Federal Filings

wire in May. (One fund would be market-cap-weighted like the underlying index, while the other would give all stocks equal weight.)

Fine. But I couldn't find a phone number for this firm. I couldn't find an SEC filing under its name. And this index doesn't trade anywhere. One of my colleagues passed along a toll-free number that he found in some old notes. I called it and was greeted by someone who sounded a lot like one of my kin people. I had reached

The Nottingham Co.

in Rocky Mount, N.C., which provides administration and accounting services for mutual fund companies.

Frank "Kip" Meadows, managing principal at Nottingham, says Internet 100 Advisors may roll out the equally weighted index fund first. Meadows says the SEC won't allow the firm to call them actual index funds because the underlying index is not readily recognizable.

No manager is named in the filing. Meadows says he couldn't reveal the manager's name because that "gentleman is currently working for another firm."

All this information still doesn't tell you whether you should invest in an Internet index fund if one is launched. Some will argue that in such a narrow, volatile area of the market, an active manager could add value over an index.

But in theory, an Internet index fund could deliver the same type of benefits as the giant

S&P 500

index funds, namely lower fees and tax efficiency. It's too early to tell whether that will be the case as far as fees are concerned.

The annual expense ratio of the proposed Investec Guinness Flight fund, for example, would be capped at 1.35%, says Atkinson. That's the same as the expense ratio for the actively managed

(MNNAX) - Get Victory Munder Multi-Cap A Report

Munder NetNet fund (which carries a front-end load of 5.5%), though less than the 3.08% expense ratio for the actively managed

(WWWFX) - Get Kinetics Internet Fund NL Report

Internet fund.

If you eventually consider investing in an Internet index fund, take a close look at the underlying index. Some are broader than others, and the performance does vary. For 1999, for example, the 20-stock TheStreet.com Internet Sector index was up 39.9% through Friday, compared with 46.7% for the 40-stock Dow Jones Internet index and 35.5% for the 50-stock Inter@ctive Week index.

One of the beauties of a broad, non-Internet index fund is the level of diversification you get. That's not so true for the Internet variety. Remember with an Internet index fund, you will be investing in a very tight area of the market. When this sector is in the Dumpster, actively managed and index funds alike will perform poorly.

Send your questions and comments, along with your full name, to

deardagen@thestreet.com.

Dear Dagen aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.