Dear Dagen: Merrill Adds Telecom and Drug Stocks to HOLDRs Lineup

For all the ardent admirers of the Merrill Lynch Internet HOLDRs (HHH) security, there's more.

Merrill is planning to launch two more of these exchange-traded, 20-stock baskets: Telecom HOLDRS and Pharmaceutical HOLDRs. These securities will trade on the American Stock Exchange under the symbols TTH and PPH, respectively. The exact date of the launch couldn't be confirmed, but it could be this month.

Share your investing and mutual fund questions on the Dear Dagen board These two baskets will work just like Merrill's existing Internet and Biotech (BBH) HOLDRs. Through one transaction, an investor gets an ownership interest in 20 stocks without paying 20 separate commissions. These securities are bought and sold just like stocks from a full-service or discount broker.

These securities are much cheaper to own than mutual funds. Unlike funds, these baskets do not carry annual expense ratios. The only recurring charge is a $2 quarterly custody charge per 100 shares, and whatever portion of that charge isn't covered by the dividends is waived.

Investors can also redeem HOLDRs shares in round (100-share) lots and get the underlying stocks in return. This exchange costs $10 per 100 shares. The fee goes to the trustee, the Bank of New York (BK).

One drawback: These securities can only be bought in round lots, which does preclude some investors from buying them.

The only difference between Merrill's existing HOLDRs and the upcoming Telecom and Pharmaceutical HOLDRs is the stocks in the respective baskets. Like the Internet and Biotech HOLDRs, the Telecom and Pharmaceutical baskets hold stocks that are generally considered to be among the 20 largest and most liquid U.S.-traded companies measured by market capitalization and trading volume.

Telcom HOLDRs will start with top holdings SBC Communications (SBC) and AT&T (T) at 15.6% and 15% weightings, respectively.

MCI WorldCom (WCOM) commands 12.5% in the initial structure. Remaining holdings, including Bell Atlantic (BEL) and BellSouth (BLS), have single-digit weightings.

In the Pharmaceutical HOLDRs, Merck (MRK), Pfizer (PFE), Johnson & Johnson (JNJ) and Bristol-Myers Squibb (BMY) combined control 58.3% of the initial portfolio. The remaining 16 holdings include stocks like Warner-Lambert (WLA) and Allergan (AGN).

Initially, the maximum weighting for any one stock stands at 20%. However, once the basket begins trading, a single stock's allocation can run over that number. Because of its rapidly rising price, Yahoo! (YHOO) dominates the Internet HOLDRs. It comprises about 32% of the value of the basket, while the smallest holdings, like Go2Net (GNET), each represent less than 1%.

Obviously, a few stocks can easily wind up dominating a fixed portfolio like this. And if a stock in the basket is involved in a merger or acquisition, it can be removed. Last week, I discussed whether that would happen to America Online (AOL) in light of its merger with Time Warner (TWX).

Reader Bob Gorman finds this possibility somewhat disturbing.

"I bought Internet HOLDRs because it contained AOL, and I'll be [upset] if Merrill pulls AOL out of the basket. AOL just became a stronger Internet company!" Gorman declares.

The composition of these baskets is driven by the rules outlined in their prospectuses. The rules are designed to keep them focused on their sectors. If Ford (F) bought AOL, that combined company wouldn't dare belong in an Internet-only portfolio, and rules exist to prevent this.

Once a stock leaves one of these baskets, a new one will not be added to take its place. That decisionmaking would require human intervention, and these securities are structured to exist without a manager, which would cost the investor more in fees.

Reader Robert Knight is having a different sort of trouble with the HOLDRs shares.

"I've looked around Merrill Lynch's Web site but couldn't find a great deal of information about the HOLDRs stocks. Can you point me to some information?" Knight writes.

I couldn't find any on the firm's site, either.

When I looked last week, I did see promotion of Merrill's TV commercial celebrating the new millennium. You could watch the ad over the Internet, but I found naught about the popular new securities.

I suspect that Merrill is planning a Web site specifically dedicated to the line of HOLDRs, but it doesn't exist yet.

Until then, you can find the initial weightings of each basket in their respective prospectuses. Try using the keyword search on FreeEDGAR. Just plug in "HOLDRs." A recent list of the Internet HOLDRs holdings was printed in Dear Dagen.

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