Hold On! What’s the Difference Between HOLDRS and ETFs?

HOLDRS, an acronym for HOLding Company Depository ReceiptS, are essentially a basket of stocks that cover different market sectors. Buy the appropriate HOLDRS and you get exposure to the desired industry, just like an ETF but with one major difference – HOLDRS cannot add new stocks to their portfolio. Words: 732

In further edited excerpts from the original article* Ron Rowland (www.moneyandmarkets.com) goes on to say:

Companies come and go even in the best of times. They get bought and sold, merged, go out of business, etc. No problem for an ETF that tracks an index. The index provider simply replaces departing stocks with new ones that are reasonably comparable. However, this isn’t what happens in HOLDRS. Because stocks that disappear can’t be replaced, the HOLDRS assets are redistributed to those that remain.

Over time, this means many of the HOLDRS have become remarkably concentrated in very few stocks. The Broadband HOLDRS (BDH), for instance, have around 56 percent exposure to a single company, Qualcomm (QCOM), 14 percent in Corning (GLW) and 11 percent in Motorola (MOT). The remaining 19 percent is spread among more than a dozen smaller stocks, none of which really matter to overall performance. As such, a trade in BDH is really a trade in QCOM, GLW, and MOT.

Maybe these stocks are good opportunities, maybe they aren’t. My point is that owning Broadband HOLDRS does not give you company diversification within the broadband sector. It just gives you a basket of three stocks. If you like those three, however, BDH may work for you.

A few years ago, there were times when it made sense to buy some of the HOLDRS. That was before many of today’s ETFs had developed a market. Now, in every case, there is at least one true ETF covering the same sector as each of the HOLDRS — without the excessive company risk and without the other bothersome quirks, which I’ll go over in a moment.

Today, HOLDRS are mostly a plaything for day traders. Some of them are very active, volume-wise, but that doesn’t make them a good investment — especially if you intend to stick around for more than a few minutes.

While the lack of diversification should be enough to convince you that HOLDRS might not be the best route to go here are 3 more reasons to avoid HOLDRS and stick with ETFs:

1. Most brokers require you to buy and sell HOLDRS in 100-share round lots. You can buy a hundred shares, a thousand, and so on but you can’t buy 50 shares, or 75, or 130, or any other number that isn’t a multiple of 100. This is especially annoying for small investors. For instance, Oil Service HOLDRS (OIH) is around $120 a share. That means you have to spend a minimum of $12,000 to get in. You won’t find that kind of restriction with ETFs. Just like stocks, you can trade as few as one share.

2. With HOLDRS, you are actually a legal owner of the shares of each company in the portfolio which means you’ll get a constant stream of prospectuses, annual and quarterly reports, proxy requests, and other such paperwork, for possibly dozens of different companies. ETF sponsors don’t make you deal with all this stuff.

3. Whenever one of the companies in a HOLDRS fund pays a dividend, it gets passed straight through to you. Dividends are nice, of course but they’re even nicer when you aren’t getting blasted with several in the same week, usually in fractional amounts. All this dividend action can quickly add up to an accounting nightmare and, moreover, when a company makes a spin-off or other special distribution, it can take weeks or months for the results to show up in your brokerage account. ETFs pay you your pro rata share of dividends, if any, accumulated on the stocks held in an ETF, and interest on the bonds held in an ETF. There may also be the opportunity for dividend reinvestment.

*http://www.moneyandmarkets.com/etfs-beat-holdrs-hands-down-2-38004 (Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil.)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
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