Selecting exchange traded funds (ETFs) that accurately represent industry sectors can make or break an investment.
Before the emergence of the ever-so-versatile industry-specific ETF, investors used HOLDRS to track specific sectors such as banking, technology and retailing. HOLDRS resemble sector ETFs, but have several notable differences.
- HOLDRS are generally grantor trusts and are managed much differently than open-ended ETFs.
- They are registered under the Securities Act of 1933, they don’t have expense ratios, instead they charge an annual custody fee of $8 for every 100 shares or round lot owned.
- They can only be traded in 100-share increments, and they are a predefined collection of stocks in a particular industry sector, states Ron DeLegge of ETF Guide.
A notable fault of the HOLDRS to keep in mind is their distorted perception of their respective industry categories. When a stock in a specific HOLDR disappears or merges, the stock isn’t replaced or rebalanced; instead the HOLDR becomes more concentrated in its remaining stock holdings, causing extreme volatility.
Another such example can be seen when looking at the Retail HOLDRS (RTH), which is exposed to 18 stocks, when compared to the SPDR S&P Retail (XRT), which holds 55 stocks. The last example is in the Oil HOLDRS (OIH), which has concentrated 40% of its holdings in three companies as compared to its corresponding energy/oil ETF, the SPDR S&P Oil and Gas Exploration & Production (XOP).
The aforementioned industries are not the only ones that are misrepresented by HOLDRS. It appears that, in general, ETFs offer more diversity, less volatility and more accurate exposure to a specific sector than HOLDRs.
Be sure to understand the differences and make sure you know which type of fund is right for your portfolio before diving in.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.