by Paul Weisbruch
The Merrill Lynch HOLDRs lineup of funds is well known in the ETF industry and has been around since 2000. They carry name recognition and many investors and portfolio managers, especially those in the institutional and hedge fund space. SMH and OIH, and at one time HHH, were familiar monikers on sell side trading desks as well as those of buy side managers. The HOLDRs suite of products still retains a respectable amount of assets as well, over $5 billion in total AUM, and stands as the number 11 ETF issuer overall in terms of assets under management according to the last "S1F ETF Monthly" published in early May. Here are the issues with the products as we see them, however.
When the HOLDRs were conceived, ETFs were still in their infancy, with only a handful of broad based index products available to the investor like SPY (S&P 500 SPDR). Their launch allowed the investor to make specific sector bets, whether it be Semiconductors, Oil Services Stocks, Internet Infrastructure, etc. and this was indeed a unique offering at the time. The problem as we see it is that these products were constructed a decade ago and serve as "fixed lists" in that the securities that make up the underlying portfolios of each HOLDR product are dated in many cases, and there is nothing that anyone can do about this.
Take BHH (B2B Internet HOLDR) for instance. It has 2, count them, 2 holdings as the underlying, ARBA and ICGE. No doubt, many of the holdings that existed in 2000 have vanished into obscurity as a great number of internet companies have gone to the wayside. BHH was a relevant fund at one time, but not in this era, as the market has changed, and industries of relevance have changed over the past ten years. The HOLDRs products cannot rebalance, and are limited to the way they were set up upon inception, so if their underlying stocks disappear, merge, or simply become irrelevant due to perpetual underperformance, the products themselves become irrelevant. That does not however stop portfolio managers from using them it seems.
SMH (Semiconductor HOLDR) is still seen as a proxy for the Semiconductor space, which many follow still as an indicator of the health of the PC market and technology sector in general. But does SMH really give the investor diversified exposure to the Semi industry? Judge for yourself, in that SMH is composed of 23% INTC, 19.5% TXN, 12% AMAT (more than half of the portfolio concentrated across 3 stocks). OIH (Oil Services HOLDR) is another good example, as we at Street One still find a fair amount of portfolio managers using this ETF for their "Oil" exposure. Do not let the name fool you, as OIH does not give the investor direct exposure to the price movements of a barrel of oil, but instead is invested in a pre-set list of Oil Services stocks (13.3% RIG, 13.1% SLB, 11.6% HAL, 8.5% BHI). It is at the mercy of the swings of the market as far as "re-balancing" the portfolio because there is no inherent re-balancing mechanism within these funds. (For more on OIH read a previous article that we posted here.)
If you own BBH (Biotech HOLDR), consider IBB (iShares Nasdaq Biotechnology), XBI (SPDR S&P Biotech), PBE (PowerShares Dynamic Biotech and Genome), or FBT (First Trust NYSE Arca Biotech) for greater diversification and a more timely "basket" that gives you exposure that you are really looking for without the performance lag that may occur from being overweight a handful of names.
For Regional Banks, RKH (Regional Bank HOLDR) owners may want to consider KRE (SPDR KBW Regional Banking), IAT (iShares Dow Jones U.S. Regional Banks), and PJB (PowerShares Dynamic Banking).
Alternates to the ever popular SMH (Semiconductor HOLDR) include IGW (iShares S&P North American Tech - Semis), XSD (SPDR S&P Semiconductors), and PSI (PowerShares Dynamic Semiconductors).
In the Software (SWH) space, potential alternatives are IGV (iShares S&P North America Tech - Software) and PSJ (PowerShares Dynamic Software).
Finally, as with the Telecom sector, in what sounds like the dated "Wireless" space, Wireless HOLDR (WMH), there are no true alternatives that focus solely on Wireless companies. Instead, there are ETFs out there that invest in broad slices of the technology market so as not to be heavily concentrated across a handful of names that may have been very relevant ten years ago.
The HOLDRs products are simply older vehicles, and ones that do not change with the times. In 2010, as challenging and competitive as the markets are, and with managers of all ETF portfolios sprouting up coast to coast, investment managers should no longer be choosing ETF products based on comfort and familiarity of routine, but instead should dig deeper and isolate the best products that match their desired portfolio exposures.
Disclosure: No positions
