Updated: 12-Oct-99
The Internet Basket Investment: HHH
(BRIEFING.COM - Robert V. Green) Ever want to trade the entire internet marketplace, but feel like an internet mutual fund isn't the right vehicle? Or get a diversified portfolio of internet stocks you can sell anytime, but without having to buy 100 shares of each company? You might be interested in the Merrill Lynch Internet HOLDRs, a derivative investment that trades like a stock, but comprises 20 internet companies. But even if you don't buy one, the HHH price history provides a more accurate indication of investor returns in the market than most internet indexes. Here's a short explanation of what an Internet HOLDR is.
Created Product
The Merrill Lynch Internet HOLDR is a created product. In effect, HOLDRs are similar to depository receipts issued by foreign companies. A HOLDR share is not direct ownership of a share in a company, but it represents direct ownership. The actual shares represented by each HOLDR are held "on deposit" by a trustee, and owners of the HOLDR security can request the represented shares at any time. (For a 0.10 per share fee.) (See below for a list of the stocks in the fund).
Merrill Lynch sold $400 million of HOLDR shares on September 22. These initial shares were created by Merrill Lynch depositing the appropriate number of shares in the trustee account, and then selling the HHH shares to institutions. These shares have since been appearing on the market in increasing numbers.
There are a total of 3,766.700 shares of HHH outstanding.
Trades Like A Stock
The HHH security trades exactly like a stock on the AMEX. You can execute a trade at any time, place market or limit orders, and short the security (if available).
However, unlike a stock, you can only trade HHH shares in round lots of 100 shares. There is only one market maker, Merrill Lynch.
Arbitraged by Big Players
One of the reasons that Merrill Lynch created this product, in our opinion, is to provide arbitrage opportunities for their clients and their own trading desk.
An arbitrage opportunity exists anytime there is a difference in price between the HHH basket of stocks, and the collected prices of all 20 stocks, in the right proportions.
For example, yesterday the HHH security closed at $116 13/16, or $11,681.25 for 100 shares. The total value of the underlying stocks in 100 HHH units was just $10,846.21, however.
To capture this inefficient pricing, however, requires great finesse, however, along with the ability to execute programmed trades.
Unless you have considerable amounts of money (six or more figures) to play with, we would not recommend that you engage in arbitrage plays between the HHH values and the underlying stocks. Without computerized buying programs, and the ability to short any stock on the list, it is simply going to be too hard for most individual players.
Merrill Lynch clients, and possibly the Merrill Lynch trading desk, is probably taking arbitrage positions in these stocks all the time.
Why Buy One?
A long term investor might be interested in HHH shares as a way to buy diversification across the industry on a relatively inexpensive basis.
A trader may find it easier to play "the internet market" with HHH shares rather than taking positions in individual stocks. Buying HHH removes some of the risk associated with individual company events. However, since not all of the stocks are represented equally, this risk is not uniformly applied.
Conversion Capabilities
The HHH security can be converted into the composite stocks behind it at any time. A transaction fee of $0.10 for each HHH share is charged. There is no tax consequence associated with the conversion of an HHH security to individual stocks.
Composite Stocks
The Internet HOLDR shares can only be purchased or sold in round lots of 100 shares. In a way, this makes them more like a single share of a unit trust. However, unit trusts cannot be dissolved at the discretion of the individual holders. The HHH security can be.
You should think of an HHH investment in terms of 100 lot shares. Based on yesterday's close that makes a single HHH investment worth $11,600. Buying "two" investments in HHH costs $23,200. These aren't for casual investors.
The twenty stocks in the HOLDR, with their proportional representation, are listed below.
Company Stock Shares
America Online AOL 21
Yahoo YHOO 13
Amazon.com AMZN 9
eBay EBAY 6
@Home ATHM 17
Priceline.com PCLN 7
CMGI CMGI 5
Inktomi INKT 3
RealNetworks RNWK 4
Exodus Communications EXDS 4
E*Trade EGRP 12
DoubleClick DCLK 2
Ameritrade AMTD 8
Lycos LCOS 4
CNET CNET 4
PSINet PSIX 3
Network Associates NETA 7
EarthLink Network ELNK 2
MindSpring Enterprises MSPG 3
Go2Net GNET 1
Investing in HHH
If you choose to invest in the HHH as a trading vehicle, you should probably build yourself a spreadsheet program that calculates the underlying value of the internet stocks at any given time. It is important to note that there will always be a slight difference between the underlying value of the stocks and the actual price of the HHHs. This difference is attributable both to arbitrage trading pressures, and the simple fact that demand and supply characteristics of the HHH may vary from that of the stocks.
If you choose to invest in the HHH as an investment vehicle, a way to buy a diversified assortment of stocks in an affordable way, you should carefully review the proportional values of the stocks that make up a HOLDR.
An investment in 100 shares of HHH today is 22% AOL and 21% YHOO. Real Networks (RNWK) and Inktomi (INKT) are each only 4% of the HHH. Movements in AOL and YHOO will have a greater impact on the price of the HHH than movements in INKT and RNWK.
Even though this investment is legal the same as ownership, it is still a derivative investment. The creation of derivatives generally increases both volume and volatility in a stock, as additional investment plays become available. While greater liquidity is always beneficial to a market, greater volatility increases risk.
A Good Measure For The Market
Finally, if you just want to follow "the internet market," watching the HHH share prices is more meaningful than just following some of the other indexes that track internet stocks. Because the weighting in the HHH is fixed, and does not vary by market cap, it may more accurately represent what a long term holder of internet stocks receives as a return.
Market cap based indexes only represent a return obtainable by an investor who continually alters his holdings to match the changing market cap relationships. No one does that, and there isn't an internet index fund. This leaves only HHH as an accurate indicator for returns that a diversified portfolio of internet stocks might achieve.
Since being issued on September 22, HHH shares have risen 9.4% from the close on the first day of trading.
Comments can be emailed to the author, Robert V. Green, at rvgreen@briefing.com. |
