Often turning up in the same circles as exchange traded funds (ETFs) are HOLDRs, which appear to be similar but are actually different in some very key ways. Read on to find out what the heck these things are and whether they’d actually be right for you.
HOLDRs is an acronym for Holding Company Depository Receipts. Designed and launched by Merrill Lynch in the 1990s, they’re classified as ETFs, but here’s how they differ:
- They cannot add any shares to its portfolio. This means that if a company goes out of business or is merged with another one, that name simply drops out of the portfolio and it isn’t replaced. Instead, the remaining shares are rebalanced. This is why many HOLDRs have huge allocations to certain companies (sometimes as much as 45% of the total portfolio).
- They can only be bought and sold in blocks of 100. That’s not fun for an individual investor, many of whom appreciate a little flexibility.
- There are no expense ratios. Don’t get excited; that doesn’t mean they’re free. They charge an annual custody fee of $8 for every 100 shares owned. [Differences Between HOLDRs and ETFs.]
Ron Rowland for Money & Markets says that day traders seem to find the greatest appeal in HOLDRs, since they often see strong volume. But are they right for most ETF investors? Although they appear similar in many ways, you might prefer the trading flexibility that ETFs have, as well as their diversification. If you’re thinking about a HOLDR, look at its underlying holdings to know what you’re truly getting. [How to Size Up an ETF.]
For more stories about ETFs, visit our ETF 101 category.
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.