HOLDRS from Merrill Lynch

A Sector Investing Perspective

Holding Company Depositary Receipts or HOLDRS, issued by HOLDRS Trusts, are receipts that represent beneficial ownership of a specified group of stocks.

The HOLDRS are exchange-traded products listed for trading on the American Stock Exchange and are marketed by Merrill Lynch, Pierce, Fenner & Smith Inc., the initial depositor for the HOLDRS Trusts. The HOLDRS Trusts themselves are not registered investment companies under the 1940 Investment Company Act.

Breadth of Merrill Lynch HOLDRS

Merrill Lynch markets two sector and 13 industry-group HOLDRS. Seven of the HOLDRS are in the technology sector with four of them oriented towards different facets of the Internet.

Investment Approach

The composition of each HOLDRS Trust is not actively managed. Each HOLDRS Trust typically included shares of 20 companies when the Trust was formed. Merrill Lynch selected the securities included in each HOLDRS Trust at inception. Changes to the list of shares included in the HOLDRS Trusts are typically the result of corporate events like spin-offs or reconstitution events like mergers.

Expense Ratio

As trustee and custodian, The Bank of New York charges $2.00 in custody fees each quarter for each round-lot of 100 HOLDRS owned. These fees are deducted from cash dividends or other cash distributions the HOLDRS Trust receives from the underlying securities. The Bank of New York waives any portion of the fee that exceeds total cash dividends and other cash distributions.

Trading Size

Merrill Lynch HOLDRS trade only in round lots of 100 HOLDRS. As such, HOLDRS may be purchased or sold only in 100 HOLDRS increments.

AlphaProfit Take

Merrill Lynch HOLDRS allow investors to own a diversified group of stocks with a single investment. HOLDRS typically have an aggressive orientation since they tend to focus on relatively narrow and volatile industry groups while limiting the number of securities.

The composition of HOLDRS does not change except in case of corporate or reconstitution events. Even when such events take place, no new security is added. Such constraints in combination with rampant merger activity in some groups have caused some HOLDRS to become highly concentrated in a few securities, e.g., Telecom HOLDRS. The burst of the technology bubble has also resulted in some HOLDRS becoming overwhelmingly concentrated, e.g., B2B HOLDRS.

The 100 HOLDRS round-lot minimum may however make the minimum amount required for investing in some HOLDRS relatively large for some retail investors. Some HOLDRS are popular among institutional investors and they tend to be actively traded.

An attractive feature of the HOLDRS though is their relatively low expenses. One should evaluate each HOLDR on its own merits before making commitments.

AlphaProfit Newsletter and HOLDRS Recommendations

AlphaProfit Sector Investors' Newsletter is the premier resource for sector investors. The Newsletter offers recommendations on Merrill Lynch HOLDRS. The Newsletter and its model portfolios have frequently been ranked #1 by Hulbert Financial Digest.

Merrill Lynch HOLDRS List