Subject: Stocks - Holding Company Depositary Recepits (HOLDRs)

Last-Revised: 16 July 2000
Contributed-By: Chris Lott (contact me)

A Holding Company Depositary Receipt (HOLDR) is a fixed collection of stocks, usually 20, that is used to track some industry sector. For example, HOLDRs exist for biotech, internet, and business-to-business companies, just to pick some examples. A HOLDR is a way for an investor to gain exposure to a market sector with at a low cost, primarily the comission to purchase the HOLDR. All HOLDR securities trade on the American Stock Exchange; their ticker symbols all end in 'H'.

Although a HOLDR may sound a bit like a mutual fund, it really is quite different. One important difference is that nothing is done to a HOLDR after it is created (mutual funds are usually managed actively). So, for example, if one of the 20 companies in a HOLDR gets bought, thereafter the HOLDR will have just 19 stocks. This keeps the annual expenses very low (currently about $0.08 or less per share).

So maybe a HOLDR is much more like a stock? Yes, but also with some differences. Like stocks, HOLDRs can be bought on margin or shorted. But unlike stocks, investors can only buy round lots (multiples of 100 shares) of HOLDR securities. So buying into a HOLDR can be fairly expensive for a small investor.

Interestingly, an owner of a HOLDR is considered to own the stocks in the HOLDR directly, even though they were purchased via the HOLDR. So

the HOLDR holder (sorry, bad joke) receives quarterly and annual reports from the companies directly, receives dividends directly, etc. And, if the investor decides it's a good idea (and is willing to pay the associated fees), he or she can ask the HOLDR trustee to deliver the shares represented by the HOLDR; the HOLDR then is gone (cancelled), and the investor holds the shares as if he or she had purchased them directly.

Merrill Lynch created the first HOLDR in 1998 to track the Brazilian phone company when it was broken up. Merrill (or some other big financial institution) serves as the trustee, the agency that purchases shares in the companies and issues the HOLDR shares. When a HOLDR is first issued, the event is considered an IPO.

Here are a few resources with more information.

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