HOLDRs are a close cousin to Exchange-Traded Funds and are subject to the same rules and regulations. Like ETFs, they are similar to closed-end funds. However, unlike ETFs and closed-end mutual funds, an investor in a HOLDR, for all intents and purposes, owns the underlying shares in the companies that the HOLDR is invested in. This means you will receive lots of mail if you own a HOLDR: quarterly reports, annual reports and meeting announcements will unfortunately fill your mailbox.

Merrill Lynch manages the entire line of HOLDRs. The brokerage giant created these HOLDRs essentially as sector funds. Each HOLDR, at its time of creation, invested in shares of companies in a particular line of business. One of the biggest differences between HOLDRs and virtually any other type of mutual fund or ETF is that these portfolios will never change at the behest of the manager. For example, 100 shares of the Semiconductor HOLDR (SMH) will always include an interest in shares of Intel Corporation (INTC) as long as Intel remains a listed corporation.

What is interesting and important to understand about HOLDRS is that although Merrill Lynch will never alter the make-up of the funds, it is entirely possible that these funds, over time, will look a lot different in the future. Since the funds' component stocks never change, bankruptcies, mergers and acquisitions could substantially alter the make-up of any given HOLDR. 

Let's consider a couple of scenarios so you can understand what this would mean. As of close of business on April 8, 2004, each 100-share lot of the Semiconductor HOLDR (SMH) contained 30 shares of Intel Corp. (INTC), meaning that Intel accounted for 20.17% of the fund's total value. Although a sudden bankruptcy is unlikely, if that were to occur, then SMH's value would fall by about 20% just from Intel's collapse alone. Also, the relative size of all other holdings would increase by about 1/3. Therefore, Texas Instruments (TXN), which now accounts for 15.77% of SMH, would jump to more than 20% of the fund's value (assuming no other prices of the underlying stocks in the fund changed).

As another interesting example, let's take a look at the impact of mergers, acquisitions or spin-offs. We've already seen that kind of activity in the Internet HOLDR (HHH). The fund originally held stock in AOL, so it now owns Time Warner (TWX), which merged with AOL. However, AOL represents just 20% of TWX's revenue and even less of its profits.

Imagine what would happen if -- and I admit this is far fetched almost to the point of impossible -- Wal-Mart (WMT) suddenly decided it wanted to get into the semiconductor business by purchasing Intel (INTC). Suddenly, 20% of the Semiconductor HOLDR (SMH) fund would consist of Wal-Mart stock!

Because HOLDRs technically are not ETFs, most brokerage firms will not list HOLDRs in their respective ETF resource pages. HOLDRs are different from the perspectives noted above, but much like ETFs, the way they are constructed means that their price will remain very close to the underlying value of the shares that make up the fund.

Here are a few other items worth noting about HOLDRs:

• HOLDRs only trade in round 100-share lots. Why? Well, each 100 shares of a particular fund represents an undivided interest in a certain number of whole shares of the companies the fund holds.
• Not all HOLDRs are exempt from the uptick rule. The B2B Internet HOLDR (BHH) and the Internet HOLDR (HHH) have extremely heavy concentrations in certain stocks. The SEC therefore does not allow shorting on downticks in these two funds (four stocks alone account for more than 90% of HHH's value).
• Management fees are virtually non-existent when it comes to most HOLDRs. This is perfectly reasonable given that Merrill Lynch has almost nothing to do to manage these funds! The only levy is $0.08 per share per year. This fee is taken against any distributions and dividends that accrue from the stocks the HOLDRs own. However, if these issues generate less than $0.08 in income, then the fee is waived. Merrill Lynch will never take money out of your account to pay for the HOLDR.

In the table below you'll find a listing of all currently available HOLDRs:

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