HOLDRS Closure Marks the End of an Era

Happy Holidays! I hope everyone has a great time with family and friends.

Before the weekend starts, there’s one last business item you may want to settle. So pay close attention if you’re an investor in any of Merrill Lynch’s HOLDRS products.

Same Ticker, Different Funds

On the surface, HOLDRS look like sector ETFs. In fact, they are an odd hybrid with some important limitations. I wrote about them back in 2010 because so many readers were confused.

Here are the four main problems I described last year:

• HOLDRS are over-concentrated in a few stocks.
• HOLDRS must be traded in 100-share round lots.
• HOLDRS clog your mailbox with paperwork.
• HOLDRS tiny dividends make accounting complicated.

(For more details, see my original column ETFs Beat HOLDRS Hands Down!)

The good news is that these problems are solved. Merrill — now owned by Bank of America (BAC) — has thrown in the towel. HOLDRS will soon be extinct — very soon, as in after tomorrow.

New owners changed the plan.

Unfortunately, the confusion may get worse before it gets better. Van Eck’s Market Vectors brand launched six new ETFs yesterday (12/21/11) with the same ticker symbols as the six most popular HOLDRS.

Moreover, Van Eck and Merrill Lynch struck a deal that let investors in these six HOLDRS exchange their shares for shares in these new and similar (but not identical) Market Vectors ETFs.

The other HOLDRS? They’re just going away — starting tomorrow, December 23. But they’ll linger on in a zombie-like state for another year. Likewise for those in the first category that didn’t meet the December 20 deadline for tendering HOLDRS to Van Eck in exchange for shares in the new Market Vectors ETFs.

Confused Yet?

If you took my advice last year, none of this matters to you because you don’t own any HOLDRS. We have many new readers, though, so I want to review what’s happening.

For clarity, let’s divide all the HOLDRS into two groups. Group 1 consists of the following:

• Biotech HOLDRS (BBH)
• Oil Service HOLDRS (OIH)
• Pharmaceutical HOLDRS (PPH)
• Regional Bank HOLDRS (RKH)
• Semiconductor HOLDRS (SMH)
• Retail HOLDRS (RTH)

If you own any of these, Van Eck offered to let you exchange them for shares in these new ETFs:

• Market Vectors Biotech ETF (BBH)
• Market Vectors Oil Service ETF (OIH)
• Market Vectors Pharmaceutical ETF (PPH)
• Market Vectors Bank and Brokerage ETF (RKH)
• Market Vectors Semiconductor ETF (SMH)
• Market Vectors Retail ETF (RTH)

Same tickers, different funds.

However, the exchange offer ended on December 20. If you took advantage of it, you now own shares of a different product with the same symbol.

If you didn’t take Van Eck’s offer, you still own HOLDRS. Your shares have not disappeared. They are being held in trust by the Bank of New York. However, your options are now limited, and the lack of ticker symbols makes selling them very difficult.

Now, let’s look at HOLDRS Group 2, which includes:

• B2B Internet HOLDRS (BHH)
• Broadband HOLDRS (BDH)
• Europe 2001 HOLDRS (EKH)
• Internet HOLDRS (HHH)
• Internet Architecture HOLDRS (IAH)
• Internet Infrastructure HOLDRS (IIH)
• Market 2000+ HOLDRS (MKH)
• Software HOLDRS (SWH)
• Telecom HOLDRS (TTH)
• Wireless HOLDRS (WMH)
• Utilities HOLDRS (UTH)

All the Group 2 HOLDRS will be delisted after the close on December 23. But even more importantly, Van Eck has NOT offered to exchange your Group 2 shares, and Merrill Lynch no longer wants to be bothered with you.

If you own any of these, your best bet is probably to sell them today or tomorrow. Otherwise, you’ll be in the same boat with Group 1 shareholders who declined the Van Eck exchange offer (you can get some additional details at www.VanEck.com/holdrs).

In one way, I’m a little sad to see the HOLDRS go away. Why? It’s the end of an era. The first HOLDRS arrived in September 1999, becoming just the 31st of what now numbers nearly 1,400 listed ETFs. Despite all the drawbacks, they were a big step toward the development of today’s ETF menu. For that, we should all be grateful.

Best wishes,

Ron

P.S. In my International ETF Trader, my team and I provide members with comprehensive research behind every ETF trade, along with unbiased information on the markets and major trend changes. To learn how to join, RISK FREE, click here.