Case 36: HOLDRs

A type of security, known as a HOLDR, is now available to investors. The first HOLDR was introduced by Merrill Lynch in September of 1999. Since then several more have been offered, and given their early success, this trend is likely to continue.

A HOLDR is similar to a Unit Investment Trust (UIT) in that both are unmanaged baskets of securities that can be redeemed for their underlying assets. The primary differences involve pricing and trading. UITs are like mutual funds in that their price is calculated once a day, at the end of each trading session. HOLDRs, on the other hand, trade like stocks in that their price changes continuously during trading hours. This is an added attraction in today's environment of so many day traders.

The second major difference is that it is not difficult to find the price of a HOLDR. HOLDRs have a ticker symbol which means it is very easy to track their prices - say from various Internet sites. UITs do not have ticker symbols. Investors are often forced to call brokers or the trust sponsor to get pricing information. In response to the new, much more convenient HOLDR security, a UIT industry representative states, "It's being discussed among the major broker/dealers and sponsors, and we want to implement them (ticker symbols) as soon as possible."

Other differences between the two types of secureties include changes in the composition of portfolios (HOLDRs are completely fixed, whereas UITs can add securities - particularly ones that track indexes), sales charges (HOLDRs are very similar to common stocks, whereas UITs are quite complex and vary from UIT to UIT), and time to maturity (HOLDRs, like common stocks, have no expiration, but UITs have a finite life).

While it is difficult to draw definite conclusions as to which type of investment vehicle is better for investors, HOLDRs do seem to have caught the attention of UIT sponsors. What we do know is that Merrill Lynch plans to offer more of these stock bundles in the future. Whether HOLDRs will cut into the volume of UIT trading, simply attract more capital into the markets as a whole, or at least provide a financial incentive for the UIT industry to improve upon the transparency and availability of price data for their products remains to be seen.

Questions

1. What causes firms, like Merrill Lynch, to offer new variations of existing securities?

2. When compared to UITs, why would HOLDRs attract more day traders?

3. Do you think it is a coincidence that the UIT industry is starting to offer better price availability now that HOLDRs have emerged? Explain.

4. The HOLDRs introduced thus far by Merrill Lynch have been industry specific (Internet - HHH, Biotech - BBH, Telecom - TTH, and Pharmaceutical - PPH). Considering diversification, is it enough to hold just one type of HOLDR? Explain.