Van Eck Global, the New York-based money management firm known for its family of Market Vectors ETFs, filed paperwork with U.S. regulators to market six sector-specific ETFs, in an unprecedented move that will change the most successful existing Merrill-Lynch-sponsored HOLDRs into bonafide exchange-traded funds. Terms werenât disclosed.
Under an agreement between Van Eck and Merrill, the ETFs now in registration will retain the corresponding HOLDRsâ tickers in an effort to give investors âthe opportunity for uninterrupted exposure to target industries,â Van Eck said on its website. The six HOLDRs have a combined $3.65 billion in assets, or almost 90 percent of all assets in Merrillâs 17 existing HOLDRS.
"This transaction and the expected exchange offer includes HOLDRs with the highest assets and/or trading volume, and that, in our opinion, represent the best strategic fit for the Market Vectors suite of ETFs," Adam Phillips, Van Eckâs managing director of ETFs, said in a telephone conference with IndexUniverse.
The plan is the latest sign that the ETF juggernaut is gathering steam. As of Thursday, U.S. investors had more than $1.1 trillion allocated to various ETFs and that growth has outpaced inflows in 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. That set-and-forget aspect has made them increasingly irrelevant as ETFs have evolved, even though the six in the Van Eck deal still hold significant assets.
âWe believe ETFs offer significant advantages over HOLDRs in their ability to evolve with a dynamic underlying index," Phillips said in a press release. âThis in turn leads to enhanced diversification and broader-based representation of a market or industry segment.â
Van Eck said it expects the exchange offer to happen sometime in the third quarter, and that the whole transaction to be consummated in the fourth quarter.
In the conference call, Phillips declined to speculate on what the tax consequences would be for investors who choose to accept the exchange, and also wouldnât venture a guess as to how many investors might actually agree to the exchange. He said paperwork on the exchange is likely to be filed in late September, at which time finer details surrounding the exchange would be clearer.
While HOLDRs are registered under the Securities Act of 1933, the ETFs Van Eck is putting the new ETFs into registration under the Investment Company Act of 1940. In the filing, Van Eck said the new ETFs will each have annual expense ratios of 0.35 percent in annual fees. They include:
- Market Vectors Biotech ETF (NYSEArca:BBH), which will track a proprietary rules based, float adjusted, modified market capitalization weighted benchmark comprised of the 25 largest and most liquid companies in the biotechnology space.
- Market Vectors Money-Center Bank ETF (NYSEArca:RKH), which will focus on the top 25 banking names.
- Market Vectors Oil Services ETF (NYSEArca:OIH), which will comprise the top 25 companies in the oil services industry, companies involved in equipment used to find and extract oil.
- Market Vectors Pharmaceutical ETF (NYSEArca:PPH), which will invest in the top 25 drug companies that conduct anything from pharmaceutical research and development to drug marketing and sales.
- Market Vectors Retail ETF (NYSEArca:RTH), which will focus on the 25 largest, most liquid retail companies.
- Market Vectors Semiconductor ETF (NYSEArca:SMH), which will comprise the top 25 U.S.-listed semiconductor companies.
Merrill Lynch is expected to delist the HOLDRs once the transaction is completed, Van Eck said on its website.
The holders the new funds will replace are:
- Oil Services HOLDRS NYSEArca:OIH)
- Semiconductor HOLDRS (NYSEArca:SMH)
- Pharmaceutical HOLDRS (NYSEArca:PPH)
- Biotech HOLDRS (NYSEArca:BBH)
- Retail HOLDRS (NYSEArca:RTH)
- Regional Bank HOLDRS (NYSEArca:RKH)
The 11 Merrill Lynch HOLDRS that aren't part of the deal with Van Eck have assets of just under $460 million, according to data compiled by IndexUniverse.
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