Two Glaring Reasons to Be Wary of This ETF

It's like a long-forgotten star who suddenly shines in a hit movie: The HOLDRs B2B Internet(BHH Quote) sprinted past the proliferation of "inverse" and leveraged ETF offerings to finish at the top of the charts for the month of April.

The resurrection of the HOLDRs "business-to-business" offering to the investment spotlight could also be interpreted as a reminder of the hazards of the "trend following" that produced so much misery suffered in the aftermath of the tech-stock boom.

With a vault of 29.69% in its total return for April, BHH surfaced as No. 1 for the month, out of the 673 ETFs tracked by TheStreet.com Ratings.

But, as was the case eight years ago at the zenith of the Nasdaq spike, BHH's performance numbers should be accompanied by big, bold warnings. Believers in "persistence of performance strategies" and "momentum investing" should be cautious of BHH's one-month surge.

If for no other reason, caution is in order with BHH because it violates the cardinal rule that underscores the philosophical underpinnings of mutual investment funds: diversification. It currently consists of but two stocks, with 80.3% of its value in Ariba(ARBA Quote) and the remainder in Internet Capital Group.(PEGS Quote).

Because of the unique structure of the Merrill Lynch-sponsored HOLDRs -- an acronym for "HOLding company Depository ReceiptS" -- a distinct possibility exists that BHH will never consist of more than two holdings.

BHH checked into the world near the peak of the tech bubble, on Feb. 24, 2000, with an initial roster of 20 stocks. But as B2B start-up stocks merged, gravitated to other lines of business or just faded from view, BHH eliminated them from its coverage.

The fact that BHH, like the other HOLDRs offerings, is radically different in structure than most ETFs, led to its current concentration of investments. A HOLDRs is unmanaged once it debuts, but unlike ETFs and mutual funds, it holds no investments.

As its original selections drifted from their respective "business to business" mandates, they were dropped from BHH, with shares of the various deserting members distributed to its holders. Some, as veterans of the aftermath of the tech-bubble period will recall, simply faded away. Because BHH is unmanaged, replacement investments were not added.

A purchase of 100 HOLDRs by an investor results in the creation of a new "unit" that represents ownership by the purchaser of shares of the underlying companies. With open-end and closed-end mutual funds, as well as most exchange traded funds, holders own shares in the funds themselves and not -- as with the HOLDRs -- share in the underlying stocks.

Because the individual purchasers of HOLDRs become actual owners of the various stocks, they receive annual reports from the individual companies and are eligible to vote as they choose in company elections. Owners of HOLDRs can request that the shares of the various underlying companies be transferred to their individual accounts and sold at will. Dividends and other distributions in the underlying companies are paid directly to the individual investors in the HOLDRs.

Because purchases of HOLDRs are actually investments in the underlying stocks, transactions always occur at net asset value.

NOT YOUR TYPICAL ETF
	HOLDRs B2B Internet	S&P 500 Total Ret'n Index
Ticker	BHH	-
Sponsor	Merrill Lynch	-
Inception Date	Feb. 24, 2000	-
TheStreet.com Ratings Grade	E-	-
No. of stocks	2	500
1-Mo Total Ret'n (%)	29.69	4.77
3-Mo Total Ret'n (%)	26.32	1.34
3-Yr. Ann'l Std. Dev'n (%)	29.38	8.68
Data as of 4/30/2008. Source: TheStreet.com Ratings & Bloomberg For an explanation of our ratings, click here.