HOLDRS Conversion Begins: Investor Action Required

by on November 14, 2011 | ETFs Mentioned:

Van Eck has begun the process of converting six HOLDRS products offered by Merrill Lynch into traditional ETFs that will be included under the Market Vectors lineup, offering investors an opportunity to exchange their receipts in HOLDRS trusts for shares in the new ETFs. The exchange requires affirmative action on the part of investors, meaning that advisors or individuals with positions in existing HOLDRS must take action in order to receive shares in the new ETFs. The exchange offer is expected to remain open until December 20.

“We have structured the offers, in our view, to be investor friendly,” said Adam Phillips, Managing Director of ETFs at Van Eck Global. “Potential benefits of participation include the opportunity for uninterrupted exposure to target industries, a partially tax-­advantaged exchange, and no costs associated with the offers.” Van Eck also noted that the new structure could allow investors to achieve more complete and accurate exposure to the underlying industry, since ETFs are able to reflect changes made over time. Because HOLDRS use a depository trust structure, the composition of the portfolios remains static over time; the holdings of these products are generally the same as they were at inception in early 2000, with the exception of companies that have gone bankrupt or been purchased. The Internet HOLDRS (HHH), for example, doesn’t include Google (GOOG) [see Five Funky Facts About HOLDRS].

The conversion only includes six HOLDRS products:

Ticker HOLDRS Trust Market Vectors ETF Market Vectors Index
OIH Oil Service Oil Services ETF US Listed Oil Services 25 Index
SMH Semiconductor Semiconductor ETF US Listed Semiconductor 25 Index 
PPH Pharmaceutical Pharmaceutical ETF US Listed Pharmaceutical 25 Index 
BBH Biotech Biotech ETF US Listed Biotech 25 Index 
RTH Retail Retail ETF US Listed Retail 25 Index 
RKH Regional Bank Bank and Brokerage ETF US Listed Bank and Brokerage 25 Index 

The new ETFs will retain the same ticker symbols after the conversion, and each will charge an expense ratio of 0.35%. In converting the HOLDRS products to traditional ETFs, certain underlying holdings of the existing portfolios will be sold, with the proceeds used to purchase other stocks. That process may result in a tax event, with the percentage of the underlying portfolios being sold varying from product to product. According to Van Eck, the percentage of the securities underlying the existing HOLDRS expected to be sold ranges from 26% for RTH to 77% for RKH. The percentages for the other products are as follows: OIH (28%), SMH (42%), PPH (53%), BBH (62%).

Exchange Details

By electing to participate in the exchange, investors will authorizing the sale of underlying securities from the HOLRDS in order to create the new ETFs. In exchange for each share of HOLDRS held, investors will receive one share of the new ETF. Trading in the HOLDRS will be halted on December 20, and the HOLDRS trusts are expected to be terminated and delisted. The trustee has indicated that the HODLRS will eventually be liquidated, at which point investors who do not participate in the exchange would receive cash proceeds.

The six HOLDRS included in the exchange offering have aggregate assets of about $3.7 billion, which would give Van Eck a big bump if the majority of shareholders elect to participate in the exchange. According to data compiled by the NSX, Van Eck ETP assets totaled about $24 billion at the end of last month.

The 11 other HOLDRS note included in the exchange offering are expected to be liquidated at some point in the future. Those products have about $500 million in aggregate AUM, and include funds focusing on the telecom, software, utilities, and wireless sectors.

Disclosure: No positions at time of writing.