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.
