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HOLDRs Emerge as a Cheaper Alternative to UITs
By Dagen McDowell
Senior Writer
This week, Merrill Lynch (NYSE:MER - news) gave the unit investment trust industry 1.5 billion reasons to start caring about a
new product called HOLDRs.
On Tuesday, Merrill launched two new versions of these securities, initially taking in $1.5 billion. The newest HOLDRs are made
up of Telecom (Amex:TTH - news) and Pharmaceutical (Amex:PPH - news) stocks.
These fixed, 20-stock baskets, which trade on the American Stock Exchange, first appeared last September, when Merrill introduced Internet HOLDRs
(Amex:HHH - news) . They were soon followed by Biotech HOLDRs (Amex:BBH - news) . All four products have now attracted more than $3.5 billion in
investment in just a few months.
And there's a lot of evidence that Merrill plans to make HOLDRs ubiquitous by adding more industry groups.
Investors attracted to fixed baskets of stocks will inevitably face a choice between HOLDRs and the more-established UITs.
The following checklist should make any comparison easier, but it still won't cut through the murkiness that permeates the UIT industry.
After going through it, you may come away thinking that HOLDRs are, on the whole, a better deal than UITs. That should give the UIT industry something to
ponder.
Structure
The Merrill Lynch HOLDRs securities are structured like just American depositary receipts, or ADRs, which give U.S. investors an easy way to own foreign stocks
through securities that trade in the U.S.
Through one HOLDRs share, an investor owns 20 underlying stocks, receiving proxy statements and annual reports from each company.
The four existing HOLDRs portfolios each contain 20 stocks; however, future offerings could contain more. These baskets are not managed, and new stocks will not
be added. If one of the companies is acquired by another company, its stock will disappear from the portfolio.
A unit investment trust is also an unmanaged, or fixed, portfolio of securities, but UITs have finite lives. These portfolios can carry a variety of maturity periods. Some
might expire after 13 months, 18 months or five years, although you'll also see bond UITs that last for 20 or 25 years. When one expires, investors usually get their
money back or they roll over their investment into the next UIT in that series. (For a basic look at UITs, see this previous story.)
In some cases, new stocks can be added to UITs, particularly those that track indices.
Trading
HOLDRs trade like stocks. UITs don't.
HOLDRs shares trade throughout the course of each business day. However, investors can buy HOLDRs shares only in increments of 100 shares, known as round
lots. For the new Telecom basket, for example, you'd have to come up with more than $8,600 for a bare-bones investment.
Just like mutual funds, UITs are priced once a day at the close of trading and carry minimum investment requirements (say, $1,000) that are imposed by the different
firms.
Redemption in Kind
Redemption in kind simply means that investors can receive the underlying stocks in a portfolio in exchange for the basket's shares.
Both HOLDRs and UIT shares can be redeemed in kind. With HOLDRs, these exchanges can only be done in round lots and cost $10 per 100 shares. (The fees go
to Bank of New York, the HOLDRs trustee.)
With UITs, you'll usually need to have at least $10,000 in shares to redeem them for the underlying stocks. There's no fee.
Cost
If you're buying HOLDRs in the secondary market, you can get them cheap. You'll only have to pay the commission charged by your broker. These securities can be
bought through full-service or discount firms.
However, if you buy these securities at the offering (before they start trading), you'll pay Merrill a 2% underwriting fee on the amount that you purchase. If you buy
these securities before trading begins, you're in a position to take advantage of any initial pop in value that may occur. For many people, the secondary market is a
better deal, particularly if they're buying through a discount broker.
UIT sales charges are -- at best -- befuddling. These baskets can carry hefty charges that are spread out over the life of the security. The John Nuveen Internet
UIT with the five-year maturity carries a maximum sales charge of 4.5% -- 1% in the first year and 3.5% deferred over the life of the trust.
UITs can also carry small annual expenses to cover the operation of the trusts. The only recurring fee on the HOLDRs is a $2 quarterly custody charge per 100
shares. And whatever portion of that fee isn't covered by dividends is waived.
Data
Arguably the biggest disadvantage to buying a UIT is the lack of accessible information on the products. They don't carry ticker symbols, and investors are often left
to rely on the brokers and sponsors to get prices and other information. (Some of this information is available over the Internet.) Investors must use nine-character
CUSIP symbols to keep track of these baskets.
The UIT industry is, however, looking at attaching ticker symbols to these products. "It's being discussed among the major broker/dealers and sponsors, and we
want to implement them as soon as possible," says William Adams, head of structured investments at Nuveen.
Because HOLDRs trade like stocks and carry ticker symbols, you can get a quote for any of these portfolios from many Web sites.
Unfortunately, Merrill hasn't put up a Web site yet to deliver holding or pricing information to investors -- but the firm swears that one is indeed coming.
Sure, any comparison between HOLDRs and UITs may be a bit premature. Right now, only four HOLDRs securities exist, but more are coming, including some
diversified portfolios. Hopefully, the Merrill onslaught will force the UIT industry to improve the transparency and pricing of its products. |
