RSS feedThe last of the exchange traded products that we’ll be looking at is HOLDRs. HOLDRs are trust-issued receipts which represent actual ownership of a basket of stocks. They are a bit more difficult to own for small investors as it is necessary to buy HOLDRs in round lots of 100 and essentially represent the same price as buying all the stocks in the basket. So, what is the advantage of HOLDRs? Think of HOLDRs as an ETF except you’re the authorized participant. Not only that, but just by buying the round lot of 100, you always have exchangability. No need to worry about acquiring up to 50,000 shares. As a result, HOLDRs almost never trade at a premium or discount to their underlying value.
The ability to exchange your HOLDR for shares of the underlying stocks is also another added benefit for those who are looking for more control over their portfolio holdings. You can exchange your HOLDR for a nominal fee of $10 per round 100 lot and then sell shares of the pieces of the HOLDR at your discretion. This will allow you to let the best parts of the HOLDR run while realizing paper losses on the losers thus giving you tax benefits over other investment vehicles. Granted this negates some of the commission benefits of buying a holder in that, when you buy a HOLDR, you get all the stocks it holds in one transaction and, assuming you don’t break the HOLDR up, you can sell in one transaction as well.
Another tax benefit to a HOLDR is that they are statically set. Merrill Lynch, the main issuer of HOLDRs, defines a stock basket, creates the HOLDR, then lists it on the exchange. From then on, it will never change. Thus, when you buy the HOLDR, you never have to worry about trades being made on the HOLDR’s “portfolio” and having to pay capital gains on sales of stock for rebalancing. For example, in a mutual fund, regardless of whether or not a stock was purchased in the fund before you got into it. If the portfolio manager decides to sell it while you’re invested and realizes a gain, the tax hit still trickles down to you. Granted, this also means that HOLDRs are not entirely optimal as a choice in an indexing asset allocation strategy. They do, however, provide diversification within targeted niches and industries. As Merrill likes to design HOLDRs to be attractive baskets, if anything, looking at HOLDR holdings is a good way to get a feel for what the “flavor of the week” in investing is. For example, there are many technology and internet HOLDRs still outstanding from back in 2000.
To tell you the truth, HOLDRs, in my perspective, aren’t a particularly compelling investment option. With between 10 and 20 stocks represented in most HOLDR, I’d much rather attempt to pick the best stocks in each industry as opposed to invest in a HOLDR in hopes of getting targeted yet diversified exposure to a very specific industry or even sub-industry. I would say they are best for those who prefer not to do their own research and instead are looking add quick exposure to one industry or another in their portfolio. The main problem with them is their “flavor of the week” nature. Typically, by the time an industry has become popular, valuations are no longer favorable. Granted, there are a lot of HOLDRs that have been floating around for nearly a decade now so maybe there are a few which represent a good basket of nicely priced stocks out there. For more information on HOLDRs, check out the official website.
