High-tech investing through MITTS: similar to corporate bonds, Market Index Target-Term Securities give risk-averse investors exposure to high-tech growth

Money Digest, June, 1998 by Chuck Chakrapani

High-tech investing is -- and for the foreseeable future will continue to be -- the shortest most volatile route to investment riches.

As emerging technologies propel the economy towards the 21st, century there is no doubt that the high-tech sector is here to stay and will grow exponentially. However, fortunes are made and lost in a matter of months in this sector, as high growth is accompanied by high risk.

If you are risk-averse but want to participate in the growth of this sector, one alternative is to invest in an equity-linked security such as Merrill Lynch Technology Market Index Target-Term Securities (or MITTS for short).

MITTS essentially are corporate bonds that pay no interest on your investment. Rather, the return is tied to the Chicago Board Options Exchange (CBOE) technology index. This index measures the composite price performance of technology stocks.

The index consists of 30 companies and includes stocks from the following sub-sectors: computer hardware, computer software, computer systems and services, telecommunications and semiconductors.

The CBOE technology index has registered an annual compound return of 32% since it was created three years ago, in January, 1995.

MITTS were issued at a face value of $10 and are currently trading at $12 (NYSE; Symbol: TKM). They mature on August 15, 2001. At that time the face value of the security will be returned. In addition, you will receive a bonus that is equivalent to the growth of the index from the time MITTS were issued. (When MITTS were issued the index stood at 189.48; it has since risen to 255). For instance, if the value of the index is 378.96 on August 15, 2001, then the increase would be 100%. You would get the face value of $10 plus another $10 bonus as the index would have doubled since the MITTS were issued, which is not an unlikely scenario. Remember, you can also sell MITTS before maturity in the open market.

So, if you want to play the hightech game but do not have the stomach for the risks involved, you may want to consider MITTS. An investment in MITTS can limit your risk and give you exposure to an exceptional opportunity for growth.

Dr Chuck Chakrapani is Chairman of the Investors Association of Canada and Editor of Money Digest.