When analyzing the exchange-traded fund industry, investors love to know which fund has the lowest expense ratio ( Schwab U.S. Broad Market ETF ( SCHB) and Schwab U.S. Large-Cap ETF ( SCHX) both come in at 0.08%), most assets, or highest trading volume (both of the latter honors belong to SPDR S&P 500 ETF ( SPY). Another record holder in the ETF space is the B2B Internet HOLDRS ( BHH), although its distinctions are perhaps a bit less desirable.

This product (it's not technically an ETF) gives the largest allocation to a single stock, as Ariba ( ARBA) accounts for a whopping 88% of total assets. And the remaining 12% weight is given to Internet Capital Group ( ICGE), giving BHH the fewest components of any equity ETF. That's right, BBH has only two holdings. It is also currently trading around 45 cents, giving it the lowest per share market value of any U.S.-listed exchange-traded product.

HOLDRS are different from traditional ETFs in several ways.For one, the annual custody fee is not a percentage of assets, but rather a flat $2 fee for every round lot of 100 HOLDRS that is "deducted from any cash dividend or other cash distributions." So for BBH, that would imply an effective expense ratio of more than 4% ( Merrill Lynch waives any fee that exceeds cash distributions, so that 4% figure represents the maximum possible expense ratio).

Another unique characteristic of these funds is the manner in which they deal with acquisitions and divestitures. On the surface, the fact that BHH has lost more than 99% of its per-share value since the fund launched is alarming. But there's more to this number than meets the eye, just as there's a perfectly reasonable explanation for why there are only two components at present.

BHH's prospectus notes that "the companies whose securities were included in the B2B Internet HOLDRS at the time B2B Internet HOLDRS were originally issued were generally considered to be among the 20 largest and most liquid companies involved in the B2B segment of the Internet industry," indicating that once upon a time BHH was more than just ARBA and ICGE.

So what happened? The explanation is actually pretty simple.

HOLDRS treat acquisitions of underlying companies differently than most ETFs. If a stock included in a HOLDR is acquired, investors in the fund are treated as if they own the stock directly, meaning they receive a cash distribution. So following an acquisition there's no rebalancing. The acquired stock is simply removed, the cash proceeds from the sale are paid to investors, and the fund continues to trade.

As the name of BHH suggests, this fund was a product of the dot-com craze, and it originally consisted of 20 companies offering business-to-business products and services via the Internet. So it shouldn't be surprising that many of the original BHH components have either been acquired or filed for bankruptcy (if anything it should be surprising that two of the original 20 are still standing, an impressive long-term success ratio for early 2000s-era Internet start-ups).

Shortly after BHH began trading, components began to drop out as they either became acquisition targets or folded.
  • March 2000: SBC Communications acquires Sterling Commerce
  • April 2000: Kana Communications acquires Silknet Software
  • June 2000: Peregrine Systems acquires Harbinger
  • September 2000: Healtheon/Web MD acquires CareInsite
  • August 2001: Ventro merged with NexPrise
  • July 2002Scient filed for bankruptcy and was bought by SBI Group
  • .
  • January 2003: The assets of bankrupt PurchasePro.com were sold for $2.5 million after a series of accounting scandals doomed the Internet start-up.
  • April 2003: Kinko's reached a deal to acquire ImageX.com
  • January 2004: Ariba announces its plans to purchase FreeMarkets for nearly $500 million
  • July 2004: Trinity Ventures completed its go-private transaction of SciQuest
  • September 2004: Inovis agreed to purchase QRS for about $116 million.
  • December 2004: 39 patents owned by bankrupt software company Commerce One were sold off in an auction
  • March 2005: Oracle (ORCL) announced that it had purchased Retek after SAP (SAP) dropped out of the bidding.
  • December 2005: Pegasus Solutions was acquired by an equity group led by Prides Capital Partners
  • May 2007: Oracle acquires Agile Software
  • July 2007: iCrossing acquires Web development firm Proxicom
  • December 2007: Fiserv (FISV) acquires CheckFree
  • January 2008: BravoSolution completes the acquisition of VerticalNet, a vendor of supply management software solutions.

So that's how BHH got to where it is today, essentially an alternative way to buy Ariba stock with a side of ICGE. It's somewhat surprising that there are still about 9 million shares of BHH outstanding, and that the average daily trading volume exceeds 25,000 shares. If one of the two remaining components gets snatched up or goes under, it will certainly be interesting to see how BHH reacts.

At the time of writing, Johnston had no positions in the securities mentioned.

Michael Johnston is the senior analyst and founder of ETF Database, a Web-based investment resource providing actionable ETF investment ideas and an ETF Screener for investors analyzing potential ETF investments. Johnston oversees ETF Database's free ETF Newsletter, one of the most popular sources for news and commentary focusing exclusively on the exchange-traded fund industry. Johnston also maintains and develops content for ETFdb Pro, a line of analyst reports and model portfolios designed to help investors utilize ETFs to meet their investment goals.

Johnston has completed the Chartered Financial Analyst (CFA) program, and obtained his bachelor's degree in finance from the University of Notre Dame. Prior to founding ETF Database, Michael worked in a private client service group performing valuations of companies operating in a wide range of industries.

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