The deal closes the book on a tool that many people thought would replace mutual funds but which instead was outgunned by exchange-traded funds.
Van Eck essentially takes over six HOLDRS — Oil Services (NAR:OIH) , Semiconductor (NAR:SMH) , Pharmaceutical (NAR:PPH) , Biotech (NAR:BBH) , Retail (NAR:RTH) and Regional Bank (NAR:RKH) — converting them into part of their Market Vectors line of ETFs. The 11 remaining HOLDRs — with about 10% of the $4 billion plus held in HOLDRs products — are expected to be liquidated.
While few fund investors know or remember HOLDRs today, their rise and fall is a cautionary tale in an marketing climate driven by finding something new and improved to sell to a public that is obsessed with owning the latest investment gadget.
HOLDRs were the next generation of investment whiz-bang when they were launched in the fall of 1999; the stock market was booming and investors were hot for ways to generate bigger profits.
Technically, HOLDRs are a cousin to ETFs, but with their own rules. For instance, trades must be made in round lots of 100 shares. And the portfolio you buy is precisely what investors get; a HOLDR would invest in 20 stocks in an industry and hang onto them forever. If a merger or buyout removed a stock from the list, then the HOLDR had one fewer issue.
Like ETFs, HOLDRs trade by the minute, allowing limit orders. Unlike traditional mutual funds — and even index funds and ETFs — HOLDRs require no ongoing stock-picking, truly minimizing costs. Coupled with some unique tax benefits and you supposedly had the ultimate vehicle for buy-and-hold investors, who could make a play on an industry, get the biggest companies and sit back and hold them cheaply.
Merrill issued HOLDRs in some popular flavors for the times, from the basic Internet HOLDER to Internet Architecture (NAR:IAH) , Internet Infrastructure, B2B Internet, Broadband (NAR:BDH) and more. They got a lot of ink in those revved-up times; I knew it had reached mania stage when some lacrosse buddies were discussing HOLDRs on the sidelines when they should have been paying attention to the game.
The Internet HOLDR (NAR:HHH) opened with the following portfolio: Amazon.com (NASDAQ:AMZN) , America Online, Ameritrade (NASDAQ:AMTD) , At Home, CMGI, Cnet, Doubleclick, E*Trade (NASDAQ:ETFC) , EarthLink (NASDAQ:ELNK) , eBay (NASDAQ:EBAY) , Exodus Communications, Go2Net, Inktomi, Lycos, Mindspring, Network Associates, Priceline.com (NASDAQ:PCLN) , PSINet, RealNetworks (NASDAQ:RNWK) , and Yahoo (NASDAQ:YHOO) .
In time, 60% of those stocks were gone. The B2B HOLDR (NAR:BHH) is down to just two stocks, with 90% of its money in one stock; the Internet Infrastructure HOLDR (NAR:IIH) has more than 90% of its assets in two of the handful of stocks it has left.
Between management’s inability to change anything in the portfolio and the requirement to purchase round lots, investors found that they disliked the inflexibility of HOLDRs, especially compared to the burgeoning choices available in ETFs.
The great idea on the drawing board and in back-testing became a passing fad. Every passing merger or corporate takeout made the portfolios less relevant, and there was no way to fix that problem.
Know when to fold
The billions that rolled into HOLDRS in the beginning — significantly more than what is left in the 17 HOLDRs today — flowed away over time. Industry watchers say Merrill probably should have pulled the plug years ago, but the firm certainly felt no reason to give up the fees they were making on unmanaged portfolios to which they didn't have to pay much attention.
What was once the “next big thing” expired from benign neglect, hardly the ending anyone expected — especially those people sucked in by the hype and the market’s heat.
Truthfully, Van Eck’s only reason to get involved was to use the remaining HOLDR assets to bootstrap new funds. The new issues will trade under the same ticker symbols, but will be based on Market Vectors proprietary indexes of the 25 top stocks in each business. HOLDRs investors must individually approve the conversion, or they will be cashed out.
“HOLDRs are established products and they had a following — which was attractive — but ETFs offer significant advantages,” said Adam Phillips, managing director of ETFs at Van Eck. “I’m sure there are people working on the next version of ETFs or an entirely different vehicle altogether — and that investors will be told it’s the next big thing — but not every idea works out, and investors need to find whatever investment vehicle, new or old, that works best for them.”
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