ETF Update: HOLDRs, Leveraged ETFs,

HOLDRs: Do They Have A Hold On You?

HOLDRs, or Holding Company Depositary Receipts, are one of the most popularly traded ETFs on the American Stock Exchange on any given day.

However, the HOLDRs are not technically ETFs. They simply resemble them. Instead, HOLDRs are grantor trusts, which are treated and managed differently. We recently explained some of the differences between ETFs and HOLDRs, and ETF Guide gives a little more insight.

Instead of an expense ratio, they charge a small custody fee that depends on the number of shares owned. They can only be purchased in 100-share increments or round lots.

Each HOLDR is a predefined collection of stocks representing a particular sector. Unlike ETFs, when a single stock disappears from the HOLDR, the trust is not rebalanced and the stock is not replaced. This was recently seen when BEA Systems Inc. (BEAS) was acquired by Oracle Corp. (ORCL) in April. BEA was the second-largest component of the Internet Infrastructure HOLDRs (IIH).

The remaining stocks tend to become concentrated and create volatility.

There's also some question about how well HOLDRs accurately represent their sectors. For example, can a HOLDR with 12 stocks accurately reflect a diverse and frequently changing sector?

Ultimately, it's up to the investor to decide of HOLDRs are right for them and their portfolios.

Some of the HOLDRs available are:

• Semiconductors HOLDRs (SMH), up 0.7% year-to-date
• Biotech HOLDRs (BBH), up 2.6% year-to-date
• Internet HOLDRs (HHH), down 1.8% year-to-date

Leveraged ETFs Take Center Stage Of Industry

Leveraged ETFs are taking center stage of the industry as one of the fastest-growing segments.

Although investor sentiment is generally moving away from these high performance products, they're being offered at a faster and faster rate, reports Eric Uhlfelder for Financial Times.

ProShares led the pack when it first introduced the leveraged funds in June 2006. By the end of January 2008, Paul Mazzilli for Morgan Stanley says there were around 60 leveraged and inverse funds on the market. And soon, there will be a line of ETFs offering three times returns.

The primary concern about taking these funds mainstream is that leveraging is an institutional concept that causes retail and individual investors to take substantial risk, especially during these volatile times. If you decide to get involved, you need to be aware of the risks.

Leverage is not a new concept, and according to the Investment Company Institute, the U.S. mutual fund industry group more than 70% of closed-end funds of the $315 billion net worth category use leverage. ETFs use leverage in about 30-35% of funds.

Today, investors can go long or short on just about any area of the market, including currencies, sectors, commodities and bonds.

If you'd like to try long/short ETFs, just be sure to have your exit strategy in place, because long and short ETFs can experience big swings.

Among the many funds to choose from:

• Market Vectors Double Short Euro (DRR)
• Market Vectors Double Long Euro (URR)
• DB Commodity Double-Short (DEE)
• DB Commodity Double-Long (DYY)
• Rydex Inverse 2x S&P 500 (RSW)
• Rydex 2x S&P 500 ETF (RSU)
• ProShares UltraShort Lehman 7-10 Year Treasury (PST)
• ProShares Ultra Basic Materials (UYM)

Read the disclosure, as Tom Lydon is a board member of Rydex Funds.