HOLDRS, which are managed by brokerage giant Merrill Lynch, are a bit different from traditional ETFs in the way they trade and in their expense ratios. (There are some other technical issues that you might want to discuss with your tax advisor as well, after you've read the prospectus.) For example, you cannot buy or sell less than 100 shares of a HOLDR in any transaction. However, they are still exempt from the uptick rule (the uptick rule says that you cannot short a stock unless the last price change in the stock was to a higher price).

Unlike most other types of funds, which track broad-based indices that contain hundreds (or some cases even thousands) of stocks, HOLDRS consist of just a handful of stocks and are designed to track particular industry groups. Because they only track a few companies, HOLDRS are very inexpensive to manage. However, because they aren't highly diversified, HOLDRS tend to be much more volatile than the average ETF.

This lack of diversification is worth discussing further. Many HOLDRS are very heavily weighted in just one or two individual stocks. When it comes to the Retail HOLDRS (RTH), for example, Wal-Mart (WMT) accounts for more than 24% of the value of the fund. Meanwhile, Home Depot (HD) contributes another 16%, meaning that these two stocks comprise more than 40% of the value of the fund!

In my special report -- What Every ETF Trader Needs to Know: How to Protect Your Trade When Everything Looks Right -- which I've reserved only for one- and two-year ETF Authority subscribers, I discuss the importance of knowing what the charts of the main holdings in a particular HOLDR look like. With earnings season upon us (earnings surprises often cause individual stocks to move strongly in one direction or the other), it will become even more important for investors to analyze the specific holdings within these highly concentrated securities.

In my special report I also show you how to hedge these funds against moves in stocks that make up a large percentage of a particular HOLDR. (You can view the exact makeup of each HOLDR at Merrill Lynch's dedicated HOLDRS web site -- http://www.holdrs.com.) Each HOLDR consists of 100 shares of stock, and these shares are divided unevenly among the companies within the HOLDR. The Retail HOLDRS, for example, contain 36 shares of Wal-Mart. If you were bullish on the retail sector but were nervous about Wal-Mart's prospects, then you could buy 100 shares of RTH and at the same time short 36 shares of Wal-Mart. After doing so, you'd essentially own RTH without Wal-Mart in it.

The Retail HOLDRS invest in stocks of companies that are in the retail business -- stores that sell directly to consumers. I've listed the fund's top 10 holdings in the table below. These make up more than 70% of the value of the fund, and there are only 21 stocks in the whole trust. Despite taking it on the chin in 2002 and early 2003, retail stocks have performed well as of late, and a number of major retail companies are now approaching their previous all-time highs.