That Was Not a 2:1 Split in BBH

Includes: AMGN, BBH, RHHBY
by: Ron Rowland

Biotech HOLDRs (NYSEARCA:BBH) closed at $174.97 on March 31, 2009. The shares opened on April 1 at $90.05 down 48%. To some this looked like a 2:1 split. Others thought maybe it was just an April Fool’s hoax. In reality, it is just one of the many quirky features of investing in HOLDRs.

In this particular case, the catalyst was the “spin-out” of Genentech Inc. (DNA) from BBH. And yes, Genetech was a sizeable portion of that ETF.

From the HOLDRS website:

Genentech Inc. (DNA) is scheduled to be acquired by Roche Holding AG effective 3/27/2009. Upon completion, DNA will be deleted from the index. $8,360.00 in cash (88 shares in index multiplied by $95.00/share offer) will be held in the index until distributed by the Bank of NY Mellon on ex-date 4/1/2009.

The problem with HOLDRs is there is no mechanism by which the holdings can be changed. When a company is acquired, merged with another or goes out of business, any HOLDR funds containing that stock just delete it. Over time they have become extremely concentrated in just a few companies. ETFs do not have this challenge; most are based on indexes that can be easily reconstituted.

Merrill Lynch is aware of the structural problems with HOLDRS. In fact, their website implies they are doing something about it. The home page of the HOLDRS website states “the rules related to distributions of securities from the HOLDRS trust have been amended. It is anticipated that this amendment will eliminate most of the distributions of securities from the HOLDRS Trust.”

However, do not get your hopes up. Although the above text is accompanied by a graphic image screaming “new”, a click of the link reveals that this “new” amendment actually became effective more than eight years ago on November 22, 2000.

With the nearly 50% DNA weighting now gone from BBH, it appears that Amgen Inc. (NASDAQ:AMGN) will be the largest holding at about a 45% weighting. HOLDRS were revolutionary products when first introduced (circa 1999), but now there are much better alternatives available.

Disclosure: no positions