Is Merrill Lynch
Tipping its Hand with HOLDRS?
By Will
McClatchy, Editor
Mainstream broker Merrill Lynch has
introduced HOLDRS, a growing line of exchange traded
index funds. They may not be for mainstream portfolios.
Merrill's massive buying of underlying stocks ahead
of demand has led to substantial run-ups just prior
to HOLDRS being sold to retail investors. Most exchange
traded funds grow incrementally as demand grows.
On September 22, 1999, the day before trading began
for its internet HOLDRS product, the stocks underlying
Merrill's internet HOLDRS rose over 7%. Shares for
the biotechnology HOLDRS rose more than 6% one day
before that product's debut on November 22, 1999.
Initiated this fall, HOLDRS trade
just like a stock but represent dozens of top companies
in each sector. Currently available are HOLDRS for
biotech, internet, internet business-to-business,
telecom, and pharmaceutical sectors. Unlike most
exchange traded index products which cover broad
markets, these address some of the most volatile
sectors of North American equities. HOLDRS stands
for HOlding Company Depository ReceiptS, and the
underlying securities are held in trust by The Bank
of New York. Merrill selects the stocks making up
the indexes and lists them publicly.
The Wall Street Journal has reported
hedge funds poaching on the products. Institutional
traders were quoted as saying they were enthusiastically
attacking stocks on the list of the HOLDRS indexes
based on leaks of impending Merrill buying sprees.
This would be expected to drive up the cost for
small retail buyers when the HOLDRS are released
for sale to the public. Prospectuses for the products
offer disclaimers that the products could run up
just prior to small investors selecting them, and
fall soon thereafter.
Merrill is estimated to have pocketed tens of millions
of dollars in the run-up of its index products prior
to their marketing to retail investors. The brokerage
firm, however, bears the risk of a market fall during
its buying process. The firm also discloses in its
prospectuses that it stands to earn investment banking
fees from firms in each index.
Clearly HOLDRS are popular. On Friday, March 3,
the business-to-business internet HOLDRS (BHH) was
the 6th most active stock on the American Stock
Exchange.
Downloadable prospectuses include:
Internet
HOLDRS
Biotechnology
HOLDRS
Pharmaceuticals
HOLDRS
Telecom
HOLDRS
03/06/00
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