Hot new HOLDRs could be wave of the future

Your Funds

Dollars & Sense

January 23, 2000|By Charles Jaffe

THE LATEST big deal on Wall Street could have a huge effect on the latest big deal to enter the mutual fund market.

HOLDRs, or holding company depositary receipts, are a hot, new quasi-form of mutual fund. It's no surprise that Internet HOLDRs -- a basket of 20 Net stocks -- are attracting interest and -- in the wake of the America Online-Time Warner deal -- scrutiny.

HOLDRs are an unmanaged portfolio of stocks that trade like a single stock. You get a fundlike diversification of multiple stocks, plus low costs because no manager is picking those stocks, coupled with some tax benefits and the ability to place buy or sell orders at specific prices.

Created by Merrill Lynch & Co. but traded by all brokerage firms, HOLDRs debuted in the fall. The Internet variety (ticker symbol HHH on the American Stock Exchange) immediately took off, capturing $1.25 billion-plus assets in roughly four months.

Because they combine many of the best features of stocks and funds, HOLDRs and other hybrid investment products are considered the wave of the future.

Ordinary funds are beginning to look "so '90s."

Let's start with HOLDR basics. HOLDRs are a cousin to "exchange-traded funds" or "index shares" such as SPDRs (Standard & Poor's Depositary Receipts), but with their own rules.

For instance, trades must be made in round lots of 100 shares, making the current minimum purchase about $15,000.

And the portfolio you buy is precisely what you get; it never changes, unless a company gets taken out by a merger.

Stocks in the Internet HOLDR are:, America Online, Ameritrade, CMGI, CNET, DoubleClick, E*Trade, Earthlink, eBay, Excite@Home, Exodus Communications, Go2Net, Inktomi, Lycos, Mindspring, Network Associates,, PSINet, RealNetworks, and Yahoo! (With a roster like that, half of those companies could be involved in mergers this year alone.)

The America Online-Time Warner deal -- we'll call the resulting company America OnTime -- won't be consummated until the end of the year, by which time the Earthlink-Mindspring merger, which comes up for shareholder votes next month, will give a better picture of how consolidation affects HOLDRs. Still, there are two possible outcomes:

America OnTime stays in the portfolio.

It gets dumped.

If a company in the HOLDRs' basket is sold, its stock is supposed to be removed from the portfolio and never replaced. (Merrill Lynch can create new HOLDRs with different groupings of companies at any time; expect that to happen soon, and often.)

So when the Earthlink- Mindspring deal is done, for example, Internet HOLDRs will have just 19 stocks in the fold.

Conversely, a company making an acquisition should stay in the HOLDRs portfolio unaffected.

But America OnTime isn't just any merger.

As the biggest deal in history, it combines giants in two industries, and Merrill Lynch officials say they won't decide how this affects HOLDRs until they see details of the merger plan (which must be filed within 10 days of the deal's announcement).

If Merrill Lynch's powers-that-be decide that America OnTime is a media conglomerate and not an Internet stock, they might give it the boot from their Internet HOLDR.

Personally, I doubt that will happen, but since we're examining how HOLDRs work, let's consider the possibility.

HOLDRs have an in-kind redemption feature for this kind of situation. If the merged stock gets dumped, investors would receive one share of AOL-Time Warner stock for every share of America Online stock now represented in their HOLDR shares.

That's right, they get the actual America OnTime shares.

Shareholders who don't want the stock could, of course, sell their HOLDRs at market price before the deal is completed.

Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at or at the Boston Globe, Box 2378, Boston, Mass. 02107-2378.

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