Most ETF portfolio managers are likely familiar with Van Eck’s exchange offer for the Merrill Lynch HOLDRS which were enormously popular in the early 2000’s, but have waned somewhat in popularity as newer and more innovative approaches to exchange traded fund investing have emerged over the past decade.
Thus, we have not been surprised to see assets leave the existing Merrill HOLDRS products with the exchange offer on the table, as investment managers and investors alike have a choice to swap out of their HOLDRS and park the assets in equivalent ETFs that offer similar sector exposure as the current HOLDRS.
Or investors can accept the Van Eck exchange offer as the existing lineup of HOLDRS will be reshaped and reconfigured so as to be more representative of certain industry sectors and not have a static basket that does not rebalance according to some schedule (like the HOLDRS in their previous form had).
Flows this week from an assets standpoint show heavy outflows in a handful of HOLDRS, including OIH (Oil Services), SMH (Semiconductor) and PPH (Pharmaceuticals), and we are simultaneously seeing creation activity this week in XOP (SPDR S&P Oil & Gas Exploration and Production).
We would view this as a a “swap” most likely from the existing OIH into XOP, with the goal of the manager being to retain exposure to the oil and gas industry, and perhaps the index that XOP tracks is a better fit for them from a preference standpoint.