Are HOLDRS Still Worth Holding?

May 03, 2011

HOLDRS are dinosaurs, but not all of them are going extinct.


Remember the HOLDRS? During the dot-com era, these exchange-traded products were revolutionary and hot. They provided investors an exciting new way to trade a basket of stocks from a specific sector, industry or investment theme. Today, with the exception of a select few, many of the existing 17 HOLDRS look ancient and headed toward the same fate as VHS and Betamax.

HOLDRS, which stands for holding company depositary receipts, were created by Merrill Lynch between 1999 and 2001. That’s why some of them still carry names like the Market 2000+, Broadband, Internet Infrastructure and B2B Internet. In a post dot-com-bust world, these names sound silly and obsolete.

So are HOLDRS still relevant, and even worth a look? It depends on the HOLDR and what you’re looking for as an investor or trader. But before determining if they’re right for you, it’s important to know some background information on these unique products.

While HOLDRS may look and trade like traditional exchange-traded funds, they differ from ETFs in several ways, including their structure, round lot rules, management (or lack thereof) and costs. These differences can be appealing or appalling, depending on your investment strategies and goals.

Grantor Trust Structure

For starters, HOLDRS are structured as grantor trusts and registered under the Securities Act of 1933, compared with most equity mutual funds and ETFs, which are structured as open-end funds and registered under the Investment Company Act of 1940.

The grantor trust structure allows investors in HOLDRS to have direct ownership in the underlying securities in the basket. Basically, HOLDR owners are treated exactly the same as if they owned the underlying stocks.

This means that as a HOLDRS investor, you have full voting rights and will receive annual statements, proxy material and all other correspondence in the mail for each underlying security. (Those who don’t want to be barraged with mail can request to get these materials by email.)

This unique structure also allows HOLDRS to have unlimited concentration and weighting in a select few companies without any restrictions (further details on this below). Any dividends are also directly distributed to shareholders and not reinvested.

Investors even have an option to cancel their HOLDRS and receive the underlying holdings unbundled for a small fee. Currently, the Bank of New York Mellon—the trustee and custodian of all of Merrill’s HOLDRS—charges $5 per 100-share lot as a cancellation fee, although, according to the prospectus, it can charge up to $10 per 100-share lot.

Currently, HOLDRS are the only equity-based grantor trusts on the market, with most grantor trust structures seen in “physically held” precious metals ETFs, such as the popular SPDR Gold Trust (NYSE Arca: GLD) and the iShares Silver Trust (NYSE Arca: SLV).

Also, HOLDRS can only be bought and sold in round lots (100 shares). In contrast, most other exchange-traded products have no minimum share-trading rules. This means that for HOLDRS such as the Oil Services HOLDRS (NYSE Arca: OIH)—currently trading around $160 per share—an investor would need a minimum of $16,000, excluding any commissions paid to a broker, just to enter the position.

But on the flip side, investors interested in the Internet Infrastructure HOLDRS (NYSE Arca: IIH)—currently trading around $4 a share—would only need $400, again, excluding commissions.


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