By inserting stacked sheets of nominally 0.7 monolayer CdSe into a ZnSe matrix we create a region with strong resonant excitonic absorption. This leads to an enhancement of the refractive index on the low-energy side of the absorption peak. Efficient waveguiding can thus be achieved without increasing the average refractive index of the active layer with respect to the cladding. Processed high-resolution transmission electron microscopy images show that the CdSe insertions form Cd-rich two-dimensional (Cd, Zn)Se islands with lateral sizes of about 5 nm. The islands act as quantum dots with a three-dimensional confinement for excitons. Zero-phonon gain is observed in the spectral range of excitonic and biexcitonic waveguiding. At high excitation densities excitonic gain is suppressed due to the population of the quantum dots with biexcitons. ©1998 American Institute of Physics.