Van Eck Launches New ETFs To Replace Six Delisted HOLDRS

Van Eck Global rolled out six Market Vector ETFs on December 21, 2011 that began trading as newly-listed issues on NYSE Arca. 

The new ETFs will use the same ticker symbols as six similar Merrill Lynch HOLDRS products that were delisted the prior day. About two-thirds of the outstanding HOLDRS shares were tendered to Van Eck and automatically exchanged into shares of the new Market Vector ETFs.

The new funds are:

• Market Vectors Bank and Brokerage ETF (AMEX: RKH), 
• Market Vectors Biotech ETF (AMEX: BBH), 
• Market Vectors Oil Services ETF (AMEX: OIH), 
• Market Vectors Pharmaceutical ETF (AMEX: PPH), 
• Market Vectors Retail ETF (AMEX: RTH), and 
• Market Vectors Semiconductor ETF (AMEX: SMH).

The underlying indexes are designed to provide liquid and diversified exposure to each particular industry. As is typical of indexes, each is dynamic and will evolve over time to reflect changes to the industry it represents. Common traits of the new ETFs include:

• Track one of the various Market Vectors US Listed 25 Indexes
• Hold 25 of the largest US listed stocks in the sector or industry
• Use a market capitalization weighting methodology
• Have expense ratios capped at 0.35%
• Rebalance quarterly to reflect index changes

Market Vectors Bank and Brokerage ETF is truly global in nature, with just a 36% allocation to U.S. based banks. Other country representation includes Canada 17%, U.K. 11%, Brazil 9%, Spain 8%, Switzerland 6%, and Japan 5%. The five largest holdings are Wells Fargo & Co (NYSE:WFC - News) 10.5%, HSBC Holdings ADR (NYSE:HBC - News) 9.9%, JPMorgan Chase (NYSE:JPM - News) 9.4%, Royal Bank of Canada (NYSE:RY - News) 5.4%, and Toronto-Dominion Bank (NYSE:TD - News) 5.3%.

Market Vectors Biotech ETF is one of seven (five traditional and two geared) ETFs focused on biotechnology. The five largest holdings are Amgen (NasdaqGS:AMGN - News) 18.2%, Celgene (NasdaqGS:CELG - News) 9.6%, Gilead Sciences (NasdaqGS:GILD - News) 9.6%, Biogen Idec (NasdaqGS:BIIB - News) 8.2%, and Alexion Pharmaceuticals (NasdaqGS:ALXN - News) 4.8%.

Market Vectors Oil Services ETF has a good chance of retaining the role of its HOLDRS predecessor – being the most popular energy services industry ETF. The five largest holdings are Schlumberger (NYSE:SLB - News) 19.2%, Halliburton (NYSE:HAL - News) 10.0%, National Oilwell Varco (NYSE:NOV - News) 9.1%, Baker Hughes (NYSE:BHI - News) 6.7%, and FMC Technologies (NYSE:FTI - News) 4.8%.

Market Vectors Pharmaceutical ETF is one of five pharmaceutical ETPs. The five largest holdings are Johnson & Johnson (NYSE:JNJ - News) 7.5%, Pfizer (NYSE:PFE - News) 7.0%, Novartis (NYSE:NVS - News) 5.7%, Merck & Co. (NYSE:MRK - News) 5.2%, and Bristol-Myers Qsuibb (NYSE:BMY - News) 5.1%.

RTH : Market Vectors Retail ETF will likely trail far behind the current retailing ETF popularity leader – SPDR S&P Retail (NYSEArca:XRT - News). The five largest holdings are Wal-Mart Stores (NYSE:WMT - News) 11.1%, Home Depot (NYSE:HD - News) 6.9%, Amazon.com (NasdaqGS:AMZN - News) 6.7%, CVS Caremark (NYSE:CVS - News) 5.8%, and Lowe’s Co (NYSE:LOW - News) 5.1%.

SMH : Market Vectors Semiconductor ETF also has a good shot at retaining the role of its HOLDRS predecessor – being the most popular semiconductor industry ETF. The five largest holdings are Intel (NasdaqGS:INTC - News) 19.6%, Taiwan Semiconductor ADR (NYSE:TSM - News), Texas Instruments (NYSE:TXN - News) 7.1%, ASML Holding (NasdaqGS:ASML - News) 5.1%, and Broadcom Class A (NasdaqGS:BRCM - News) 4.9%.

The HOLDRS Are Now History, NYSE Says

The final 11 HOLDRS, which collectively had about $305 million in assets, were terminated today by their sponsor, Merrill Lynch, Pierce, Fenner ' Smith, ending the lives of a family of exchange-traded products whose time has come and gone with the explosion of ETFs.

The dissolution of the 11 HOLDRS funds comes on the heels of the switch on Dec. 21 of six HOLDRS funds into Van Eck Global ETFs. The six HOLDRS involved in the Van Eck transfer had about $3.5 billion going into the exchange offer, and Van Eck said $2.3 billion of those assets went into its six new ETFs. The six securities chosen by Van Eck for the exchange offer held about 90 percent of all HOLDRS assets.

Arca, the New York Stock Exchange’s electronic trading platform, said today in a communiqué to investors that it will suspend trading in each of the 11 remaining HOLDRS prior to the opening of business on Tuesday, Dec. 27, and all open orders will be canceled at that time. Merrill Lynch said in August not long after Van Eck announced its exchange-offer plans that it aimed to shut the 11 remaining HOLDRS.

HOLDRS comprise holding company receipts that Merrill launched in the late 1990s and the early 2000s. They were narrowly focused portfolios that never readjusted their composition the way ETFs do. While they are exchange traded like ETFs, their set-and-forget structure made them increasingly irrelevant, though they remained valued for their liquidity by big investors looking for hedging tools.

Investors who owned HOLDRS will receive coupons that they can either turn into cash based on the value of the securities at the time they redeem their coupons, or they can take explicit possession of the individual securities that were previously packaged as HOLDRS.

That’s also the case for those investors who didn’t take Van Eck up on its exchange offer this week. Shareholders with about $1.2 billion in assets held in the six HOLDRS that became Van Eck ETFs didn’t tender their HOLDRS shares.

The 11 HOLDRS that were dissolved today, their tickers and their assets as of Dec. 22 are as follows:

• Broadband HOLDRS Trust (NYSEArca:BDH), $13.64 million
• B2B Internet HOLDRS Trust (NYSEArca:BHH), $8.49 million
• Europe 2001 HOLDRS Trust (NYSEArca:EKH), $3.68 million
• Internet HOLDRS Trust (NYSEArca:HHH), $47.34 million
• Internet Architecture HOLDRS Trust (NYSEArca:IAH), $29.82 million
• Internet Infrastructure HOLDRS TRUST (NYSEArca:IIH), $5.37 million
• Market 2000+HOLDRS Trust (NYSEArca:MKH), $9.76 million
• Software HOLDRS Trust (NYSEArca:SWH), $27.14 million
• Telecom HOLDRS Trust (NYSEArca:TTH), $99.88 million
• Utilities HOLDRS Trust (NYSEArca:UTH), $45.68 million
• Wireless HOLDRS Trust (NYSEArca:WMH), $10.67 million

Big changes to HOLDRs

Van Eck Global and Bank of America Corp. unit Merrill Lynch & Co. recently entered into an agreement that effectively puts an end to HOLDRS, or holding company depositary receipts. 

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.”