Merrill's Change in HOLDRs Makes Them Easier to Hold

Mergers and spinoffs won't spur distributions. Also, e-filing taxes just got simpler.
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Maybe you should hold off writing off

Merrill Lynch's

HOLDRs.

Many of you have written to me complaining that these so-called revolutionary products -- baskets of 20 stocks within one sector that can be made as a single investment -- are nothing but a record-keeping headache, especially when a company in the HOLDR merges or distributes shares in a spinoff or some other corporate action. In these instances, you'd end up with fractional shares in your brokerage account, have to determine their cost basis and eventually pay big commission fees to unload them.

Thankfully, Merrill has heard your cries and made some changes.

Starting Nov. 28, as long as the merging/acquiring companies are in the same sector, any fractional shares or distributions will stay in the HOLDRs, says Diane Garnick, global head of exchange-traded funds research at Merrill Lynch. No more extraneous shares in your brokerage account.

What makes HOLDRs different from a mutual fund is you have the option of redeeming the HOLDRs in 100-share lots and then can walk away with the actual shares of the underlying stocks. In theory, it's a great way to get a piece of a sector without having to buy 20 separate stocks.

But in practice, fractional share distributions from spinoffs and mergers are a big impediment. You would need to figure out your cost basis in these shares, which could be a complicated calculation. Even worse, if you decided to sell those shares, the commission on the trade could cost you more than the actual shares.

As an example, let's look at

Go2Net

. Up until a few months ago, it was a member of the

Internet

(HHH)

HOLDRs. But on Oct. 13,

InfoSpace

(INSP) - Get Report

acquired it. As a result of the acquisition, for each 100-share lot of the Internet HOLDR owned, you got 1.82 shares of InfoSpace.

Because stocks could not be added to the HOLDRs, those InfoSpace shares were distributed to shareholders outside the HOLDR into their brokerage accounts. (Check out the "Spin-offs & Changes" section of the HOLDRs

Web site for more details of this acquisition.)

With InfoSpace trading at $12, down about 40% since it was distributed, you're probably not too tickled about owning it. But if you decide to dump that $12 stock, you'll owe a commission on the trade. And that could cost you anywhere from $35 to $70 a pop. So it actually would cost you money to unload those shares.

Now if a company distributes shares in a spinoff or merges with a company in a similar sector, any distributions will remain in the HOLDR. Of course, if the merging company is not in the same sector, any stock distributed could not stay in the HOLDR.

So the odds of receiving extraneous shares are greatly diminished. And don't forget, the

cost basis calculator will compute your new cost basis for you.

"This change makes the HOLDRs a much more viable product," says Merrill's Garnick. It also drastically reduces your record-keeping nightmares.

Signature No Longer Required with E-Filing

Did you electronically file your tax return last year and still have to mail in that silly signature form? Or worse yet, did Uncle Sam send you an e-file customer number on a four-part postcard that would excuse you from filing that signature form -- and you lost it before you filed your return?

Fortunately, you won't have those worries this year.

The

Internal Revenue Service

will be offering totally paperless electronic tax filing this tax season, said Martin Nissenbaum, director of income tax planning at

Ernst & Young

, who heard this announcement at a recent

American Institute of Certified Public Accountants

conference.

And you won't be getting an e-file customer number from the IRS either. Instead, you can select your own five-digit personal identification number. That number, combined with your 1999 adjusted gross income and total tax due will serve as your electronic signature. Those few tidbits of information will eliminate the need to file

Form 8453-OL --

U.S. Individual Income Tax Declaration for On-Line Services Electronic Filing

, the separate signature form that many of you had to file last year. Check out this

section of the IRS' Web site for more information.

Of course, Form 8453 isn't going away entirely. You'll still have to use it if:

  • You're a first-time filer under the age of 16;
  • Any forms or attachments to your tax return legally require your signature; or
  • You'd prefer not to file electronically.

Even better news is that you will be able to add attachment schedules to your e-filed return. This is great news for traders who need to attach details of short sales and voluminous trades.

But stay tuned. We'll get more details in early 2001.

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