Van Eck Starts Exchange Offers On 6 HOLDRs

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Van Eck Global, the money management firm known for its commodities investment strategies, began the exchange offers under which six Merrill Lynch-sponsored exchange-traded HOLDRS securities will switch into six corresponding Market Vectors ETFs.

The exchange offers, which Van Eck first announced in August, will expire unless extended on Dec. 20. Trading in the six HOLDRS will be suspended 30 minutes prior to the offer expiration, and the Van Eck ETFs that replace them will begin trading the following day, the company said in a press release.

The six HOLDRs have a combined $3.49 billion in assets, or around 90 percent of all the assets in Merrill’s 17 existing HOLDRs.

The exchange offers are the latest sign that the ETF juggernaut is gathering steam. As of Nov. 9, investors had more than $1.070 trillion allocated to various U.S.-listed ETFs. Inflows into ETFs have outpaced those into any other investment vehicle as investors become more familiar with the benefits of the ETF structure.

HOLDRs, on the other hand, have had their day. The funds, which are holding company depositary receipts Merrill Lynch launched in the late 1990s and early 2000s, are narrowly focused portfolios that, once created, never changed. They are exchange traded like ETFs, but that set-and-forget aspect has made them increasingly irrelevant as ETFs have evolved.

“We have structured the offers, in our view, to be investor friendly,” Adam Phillips, managing director of ETFs at Van Eck, said in the press release. “Potential benefits of participation include the opportunity for uninterrupted exposure to target industries, a partially tax-advantaged exchange, and no costs associated with the offers.”

The HOLDRS involved in the exchange offers, and their assets as of Nov. 9, are:

  • Oil Services HOLDRS (NYSEArca:OIH), $2.00 billion
  • Semiconductor HOLDRS (NYSEArca:SMH), $556.2 million
  • Pharmaceutical HOLDRS (NYSEArca:PPH), $504.8 million
  • Biotech HOLDRS (NYSEArca:BBH), $257.5 million
  • Retail HOLDRS (NYSEArca:RTH), $93.1 million
  • Regional Bank HOLDRS (NYSEArca:RKH), $75.0 million

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All of the involved securities will retain their trading symbols, the New York-based firm said.

Exchange Mechanics

Under the exchange, each HOLDRS share will be exchanged for a share in the new respective ETF, with the value of each tendered share determined by the value of the underlying securities as of the close of business on the date the exchange offer expires, Van Eck said.

In its press release, Van Eck implored investors to consult the risks involved with participating in the offers, and specifically mentioned that the 0.35 percent annual expense of the new ETFs will be higher than expenses associated with the HOLDRs.

We weighed the various options HOLDRS have and their consequences in a recent blog titled “Taxes And The HOLDRS Demise,” including selling them, keeping the underlying securities without the HOLDRS wrappers, or taking Van Eck up on its offers.

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Tax Consequences

Van Eck said it is structuring the offers so that a portion of the exchanges will be tax free for federal income tax purposes.

That said, it also revealed the turnover it expects each of the HOLDRS will require, as it did in a conference call with journalists on Sept. 30. Such turnover is crucial as it could saddle HOLDRS investors who take part in the exchange with a tax bill.

Van Eck said that as of Nov. 4, the following percentages of stocks in each of the HOLDRS will have to be sold to turn them into Van Eck ETFs:

  • OIH, 28 percent
  • SMH, 42 percent
  • PPH, 53 percent
  • BBH, 62 percent
  • RTH, 26 percent
  • RKH, 77 percent

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Options Implications

The exchange offers may have implications for some HOLDRS options investors, particularly those with options expiring subsequent to the expiration of the exchange offers.

Van Eck noted that on Oct. 12, 2011, "the Options Clearing Corporation made an official determination regarding the settlement of HOLDRS options. The OCC’s decision is outlined on the homep age of the OCC’s website under “Latest InfoMemos,” Van Eck said.

Finally, Merrill said in a filing in August that the remaining 11 HOLDRS not involved in the Van Eck exchange are likely to be shut.

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



This article appears in: Investing , ETFs

Referenced Stocks: BBH , OIH , PPH , RKH , RTH

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