Van Eck, Merrill Let Investors Trade HOLDRs for ETFs

The deal effects six HOLDRS and should take place in the fourth quarter

Van Eck Global and Merrill Lynch have struck a deal that would allow investors in six HOLDRS the chance to exchange these investments for shares of new Market Vectors exchange traded funds, Van Eck said early Friday.

The six HOLDRS—Oil Services (OIH), Semiconductor (SMH), Pharmaceutical (PPH), Biotech (BBH), Retail (RTH) and Regional Bank (RKH)—had about $3.65 billion in assets and a combined 30-day average daily trading volume of roughly 20.07 million shares as of Thursday.

Terms of the transaction were not disclosed. Merrill Lynch is expected to de-list the HOLDRs after the transaction, according to Van Eck.

Holding company depository receipts, or HOLDRs, are a product created by Merrill Lynch that trade daily on the American Stock Exchange. They allow investors to buy and sell a basket of stocks in a particular sector, such as biotech or Internet.

 

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“As a leading provider of exchange-traded funds, Van Eck Global is an excellent partner for us on this transaction,” said Liam O’Neil, head of market-linked solutions at Merrill Lynch, in a statement.

Van Eck said in a news release that the arrangement should allow participating investors to have “uninterrupted exposure to target industries.”

The new ETFs are expected to retain the corresponding HOLDRS’ ticker symbols and should launch early in the fourth quarter of 2011.

“We believe ETFs offer significant advantages over HOLDRS in their ability to evolve with a dynamic underlying index; this in turn leads to enhanced diversification and broader-based representation of a market or industry segment,” said Adam Phillips, managing director of ETFs at Van Eck, in a statement. “We are pleased to have been chosen by Merrill Lynch to partner with them in this important transaction.”

Van Eck believes ETFs offer a more dynamic investment vehicle than HOLDRS "since ETFs are better able to reflect changes in the composition of industry sectors that inevitably occur over time.”

HOLDRS were first introduced in 1999 to give investors the chance to gain broad exposure to certain sectors through a single market-traded security. Because they use a depositary trust structure, their initial portfolio of securities generally remains static over time. ETFs, in comparison, can be rebalanced periodically and used to track an underlying index.

The underlying indices for the new Market Vectors ETFs aim to represent the most liquid stocks within that particular industry. The top 25 constituents based on full market cap and three-month average daily trading volume are included in each index.

The indices include companies that generate at least 50% of their revenues from the relevant industry; individual company weightings are capped at 20%. The indices will be reviewed semi-annually, with weighting caps applied quarterly, according to Van Eck. Index information, including daily constituents, can be found online.

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