Taxes And The HOLDRS Demise


Shutterstock photo


That’s right:The jig is finally up for the HOLDRS, the investment vehicles closely related to ETFs created 11 years ago to offer exposure to a diversified basket of stocks.

Merrill announced it’s liquidating the HOLDRS sometime in the fourth quarter of this year, while ETF sponsor Van Eck has plans to switch six of the most popular among them into Market Vectors ETFs, also during the fourth quarter.

For the uninitiated, HOLDRS—Holding Company Depository Receipts—were designed back in 2000 to give investors easy, diversified, exchange-traded access to stocks, just as ETFs do.

Unlike ETFs, however, HOLDRS are static portfolios of stocks:They never rebalance their holdings and aren’t subject to the same diversification requirements as ETFs.

Despite their quirks, the 17 HOLDRS gained a serious foothold among investors, with about $3.54 billion invested in them as of Oct. 3, according to the numbers we crunched. With the announcement that the HOLDRS are being delisted, that money has to find a new home.

There is a silver lining here:Six of the HOLDRS, with a combined $3.09 billion in assets, are being converted to true ETFs under the Market Vectors ETF banner. Investors can consent to have their HOLDRS shares converted to ETF shares, and they even get to keep the same tickers.

The six HOLDRS being converted into ETFs and their assets as of Oct. 3 are:

  • Oil Services HOLDRS (NYSEArca:OIH), $1.68 billion
  • Semiconductor HOLDRS (NYSEArca: SMH), $500.7.5 million
  • Pharmaceutical HOLDRS (NYSEArca: PPH), $475.0 million
  • Biotech HOLDRS (NYSEArca:BBH), $232.7 million
  • Retail HOLDRS (NYSEArca:RTH), $135.3 million
  • Regional Bank HOLDRS (NYSEArca: RKH), $66.4 million


For investors in the remaining 11 HOLDRS, the options are fewer:Redeem your HOLDRS shares for the underlying stocks, or sell your HOLDRS shares on the open market before the date they are delisted.

Each of the choices facing investors has unique tax consequences that are worth considering separately. Let’s take a look at them, one by one:



1. Redeem shares of the HOLDRS for the underlying stocks.

This is the one and only way to continue to defer paying tax on any gains on your HOLDRS investments. In this case, you pay a small fee to BNY Mellon to trade in your shares, and receive an in-kind distribution of the shares that underlie the HOLDRS.

No sale takes place here, which means no capital-gains tax, but, again, you would pay a transfer fee of about $10. You’ll end up with some new stocks in your brokerage account, but it’s ultimately the only way to keep your exposure identical to the original HOLDRS. One downside here is the greater transactional costs you’ll have to pay if you do want to sell these stocks down the line.

2. Sell your HOLDRS shares before they are delisted:

There’s always the option to unload HOLDRS shares on the open market before they’re delisted from the exchange. Here you’re left paying tax on any capital gains they realize on the sale, just as you would with any other stock.

3. Say “yes” to Van Eck, and consent to have your HOLDRS shares converted to ETF shares:

Entering into an agreement to have your HOLDRS shares converted to Market Vectors ETF shares has some nice benefits. For one, you get to keep roughly the same allocation in your portfolio free of charge and hassle.

You also get the benefit of holding a fund that will track an index. The indexes will allow companies to come and go, and weights to be adjusted, features the original HOLDRS never had.

The downside with this option is the capital-gains taxes that could follow. The new portfolio managers will have to buy and sell a hefty portion of the HOLDRS portfolio to conform to the new indexes. Van Eck has estimated that turnover in some of the HOLDRS will be greater than 60 percent. This has the potential to generate capital gains and, if it does, you’ll be stuck with the tax bill.

The upside, taxwise, is that you’ll certainly see less of a tax impact than if you were to sell your HOLDRS outright. That’s because some of the transition to ETFs will take place through in-kind transactions that defer any gains or losses.

At the end of the day, the calculus here is all about what your personal cost basis is and what your investment thesis is going forward. Luckily, the HOLDRS website offers a cost-basis calculator to help you with first part of the question. For the second part, you’re on your own.


Don't forget to check's ETF Data section.

Copyright ® 2011 IndexUniverse LLC . All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , ETFs
More Headlines for: BBH , OIH , PPH , RKH , RTH

More from IndexUniverse




Find a Credit Card

Select a credit card product by:
Select an offer:
Data Provided by