Thatâs 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 itâs 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, HOLDRSâHolding Company Depository
Receiptsâwere 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 arenât 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
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
Each of the choices facing investors has unique tax consequences
that are worth considering separately. Letâs take a look at them,
one by one:
1. Redeem shares of the HOLDRS for the underlying
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. Youâll end up
with some new stocks in your brokerage account, but itâs
ultimately the only way to keep your exposure identical to the
original HOLDRS. One downside here is the greater transactional
costs youâll have to pay if you do want to sell these stocks down
2. Sell your HOLDRS shares before they are
Thereâs always the option to unload HOLDRS shares on the open
market before theyâre delisted from the exchange. Here youâre
left paying tax on any capital gains they realize on the sale, just
as you would with any other stock.
3. Say âyesâ 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, youâll be stuck with the tax
The upside, taxwise, is that youâll certainly see less of a
tax impact than if you were to sell your HOLDRS outright. Thatâs
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,
youâre on your own.
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