HOLDRs vs.
 iShares®, Spydrs, Vipers, Bldrs, Hldrs

There is a BIG Difference

Essentially, a HOLDR is a static basket of stocks selected from a particular industry. As a result, HOLDRs do not track an underlying index like ETFs, and represent a rather narrow slice of an industry. Not only are HOLDRs completely unmanaged, their components almost never change. Furthermore, if a company is acquired and removed from a HOLDR, its stock is not replaced. This can result in even more concentration and added risk. In contrast, indexes that ETFs invest in can change and rebalance with some regularity, and generally contain more components.

Unlike ETFs, Merrill Lynch determines the composition of each HOLDR, and the individual stocks' initial weighting. One HOLDR can vary radically from another. For example, stocks in some HOLDRs are initially equally-weighted, while other HOLDRs' allocations are based on such parameters as market-cap, liquidity, and price/earnings, among others. For example, as of June 2005,

• The $1.42-billion Biotech HOLDRs (BBH) has more than two-thirds of its assets invested in only two companies, biotech giants Amgen (AMGN) [27.1%], and Genentech (DNA) [41.2%]. For investors who might have expected broader diversification with a number of biotech issues, this HOLDR poses greater stock-specific risk and courts high volatility.
• The tiny $21-million B2B Internet HOLDRs (BHH) comprises only six stocks in total, due to rapid consolidation in that industry. CheckFree Corp. (CKFR) alone represents a whopping 66.9% of its assets.
• Europe 2001 HOLDRs (EKH) has 44 stocks, which helps to dampen volatility. HOLDRs typically don't place concentration limits on individual stocks. As a result, investors will have to look under the hood to determine what diversification they offer.
• The very first HOLDR, Tele Brasil-Telebras Hldrs (TBH), formed in mid-1998 in connection with the break-up of Telebras, the Brazilian telecommunications giant, into 12 new companies
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• The Merrill Lynch Canada Canadian Pacific HOLDRs (HCH), was formed in connection with split-up of the railway Canadian Pacific Ltd. into five separate publicly traded entities. This HOLDR also trades on the Toronto Stock Exchange.

More Paperwork

Unlike ETFs, investors in HOLDRs have direct ownership in the underlying stocks. As a result, they have voting and dividend rights. This also means that dividends are paid directly. You may have dozens of small dividends each year to record on your tax forms. Also, The Bank of New York, as trustee and as custodian, will charge you a quarterly custody fee of $2.00 for each round-lot of 100 Pharmaceutical HOLDRS, to be deducted from any cash dividend or other cash distributions on underlying securities received by the trust. The trustee will waive that portion of the fee which exceeds the total cash dividends and other cash distributions received each calendar year. Recent changes in SEC regulation appears to require that the fee's deducted from the dividends be disclosed as a transaction on your brokerage account.

 Not for Small Investors

HOLDRs can be very expensive to buy since investors may only purchase them in round lots of 100. For example, the Biotech HOLDRs (BBH), priced at $188.87 as August 17, would require an investment of $18,887, excluding commissions. This restriction excludes most small investors from participating in certain HOLDRs.

For less complex analysis try these