Holding Company Depositary Receipts - HOLDRs
Diversification without the fees
Looking for the benefits of a diversified portfolio but don't want to pay the fees associated with it? Maybe you want a more direct and focused approach, something that most mutual funds cannot offer. Your wait is over. Merrill Lynch has invented a new type of investment that solves these problems and more. They're called HOLDRs (which is short for holding company depositary receipts).
The composition of HOLDRs
HOLDRs are essentially a bundle of stocks traded as one security.
In the past, investors that wanted to invest in a certain industry or sector were forced to buy shares of dozens of companies, paying a brokerage commission on each purchase and sale. These transaction expenses significantly lowered his investment returns over time. Now, that same investor can call his broker and place an order for HOLDRs. He will pay only one commission and receive shares in dozens of companies in exchange.
Investing in HOLDRs
HOLDRs must be purchased in lots (units of 100 or more). A single regional bank HOLDRs (symbol: RKH), for example, currently trades at $127.55; meaning an investor would have to purchase $12,755 worth ($127.55 x 100 units).
Example of Underlying Securities in HOLDRs
An investor that purchased one lot of telecom HOLDRs would beneficially own the following:
- 27 shares SBC Communications
- 25 shares AT&T Corp.
- 22 shares MCI WorldCom
- 12 shares Bell Atlantic
- 15 shares Bell South
- 8 shares GTE Corp.
- 5 shares BCE Inc.
- 6 shares Sprint FON
- 3 shares Sprint PCS
- 6 shares Global Crossing
- 3 shares Nextel
- 4 shares U.S. West
- 6 shares Qwest Communications
- 3 shares Level 3 Communications
- 2 shares Alltell
- 1 share Telephone & Data Systems
- 1 share NTL Inc.
- 2 shares Broadwing
- 1 share McLeod USA
- 1 share Century Telephone Enterprises
At any time, the investor could pay a $10 per-lot cancellation fee and take possession of the underlying shares of stock (e.g., if you owned one lot of telecom HOLDRs, you would be able to exchange it into the specific number of shares of the companies listed above). Even better, exchanging HOLDRs for the underlying securities is a non-taxable event, ensuring your money will stay invested and not go to Uncle Sam.
Types of HOLDRs
There are currently seventeen types of HOLDRs in which you can invest. They are:
- Biotech HOLDRS
- Broadband HOLDRS
- B2B Internet HOLDRS
- Europe 2001 HOLDRS
- Internet HOLDRS
- Internet Architecture HOLDRS
- Internet Infrastructure HOLDRS
- Market 2000+ HOLDRS
- Oil Services HOLDRS
- Pharmaceutical HOLDRS
- Regional Bank HOLDRS
- Retail HOLDRS
- Semiconductor HOLDRS
- Software HOLDRS
- Telecom HOLDRS
- Utilities HOLDRS
- Wireless HOLDRS
The benefits of direct investment vs. HOLDRs
One of the best things about HOLDRs is that you are eligible for all of the services and benefits provided to those who purchase shares of stock outright; dividends, annual reports, and shareholder perks are still provided quarterly or annually where applicable.
HOLDRs vs. mutual funds
Mutual funds are pools of assets invested by a professional money manager.
HOLDRs, on the other hand, are a type of basket investing. They are merely a way to acquire shares in dozens of companies by only purchasing one security. Although both mutual funds and HOLDRs offer certain diversification benefits, they are drastically different creatures.