Holding Company Depository Receipt (HOLDR)

Holding company depository receipt (HOLDR) is a security that allows investors to buy and sell a basket of stocks in a single transaction. HOLDRs allow investors to trade stocks in a specific industry, sector or group.

Holding company depository receipt (HOLDR) is a fixed collection of publicly-traded stocks packaged together as one stock. HOLDRs were created by Merrill Lynch and traded only on the New York Stock Exchange (NYSE).

HOLDRs cover a wide range of various industries such as biotech, pharmaceutical and retail. Each HOLDR represents individual ownership in the stocks underlying the HOLDR, and the value of the HOLDR fluctuates with the change in value of the underlying stocks.

HOLDRs enable an investor to gain exposure to a market sector at a low cost, and diversify within that sector. To gain the same level of diversification without this vehicle, the investor would need to purchase each company individually, thus increasing the amount of commissions.

HOLDRs are often lumped in with exchange-traded funds (ETFs), and while both products share low-cost, low-turnover and tax-efficient characteristics, they are different investment vehicles.

Indexes that ETFs invest in contain many components and regularly change. In contrast, a HOLDR is a static group of stocks selected from a particular industry and their components rarely change. ETFs also track some form of underlying index, whereas HOLDRs do not. ETFs holdings are also managed and periodically adjusted to provide the best return possible within that index. If a company is acquired and removed from a HOLDR, its stock is not replaced, which can result in more concentration and added risk.

Unlike ETFs, Merril Lynch determines the composition of each HOLDR, and HOLDRs can vary widely from another. Another key difference between HOLDRs and ETFs is that investors in HOLDRs have direct ownership in the underlying stock, which is not the case for ETFs, and as a result investors in HOLDRs have voting and dividend rights.

HOLDRs are typically bought in lots of 100, and therefore can be very expensive, thus excluding most small investors from participating in them. HOLDRs helped give rise to ETF’s, whose popularity eventually consumed some HOLDRS and caused others to be liquidated. In December of 2011, six of the 17 existing HOLDRs were converted to ETF structures and the remaining 11 were liquidated. ETFs are often preferable to investors and meet the same purpose as HOLDRs.