Personal Investment Notes

HOLDRS were created by Merrill Lynch in 1998 and sold on the American Stock Exchange (AMEX). They are trust–issued receipts that represent your beneficial ownership of a specified group of stocks. Although the HOLDRs trades like an ETF, it behaves a bit differently. HOLDRs are trusts and not registered investment companies, which means the underlying stocks included in the HOLDR do not change except for spinoffs, or mergers and acquisitions.

For example, UTH is a utilities HOLDR holding 18 top companies in the utility industry.

Dividends are paid when the underlying stocks pay their dividends so you may get several dividend payments in a month.

Risks

Unlike ETFs, Merrill Lynch determines the composition of each HOLDR and the individual stocks’ initial weighting. One HOLDR can vary radically from another. For example, stocks in some are initially equally weighted, while other HOLDRs’ allocations are based on such parameters as market cap, liquidity, and price-earnings ratio.

HOLDRS do not track an underlying index like index funds do; they are a static basket of stocks in a particular industry.

One minor inconvenience: You have to buy the HOLDR in 100-share lots. For example, UTH was around $92 on 14 Jan 2009 which means it would cost $9,200 plus the brokerage commission to buy 100 HOLDRs of UTH.

Advantages

When an issuer spins off a new security, an owner of a HOLDR receives that security in their brokerage account outside of their HOLDRS investment.
When you buy a HOLDR, you’re actually buying shares of the stocks themselves, not a fund, so you pay little or no annual fees.

HOLDRS have no hidden capital gains — you owe taxes only on gains that you actually realize.

You don’t have to pay management fees of any kind. Your only expense comes from transaction costs and from a small annual custody fee taken against cash dividends and distributions, when they are issued. This annual custody fee is eight cents per HOLDR, and will be waived if no dividends or cash distributions are paid on any of the underlying stocks.

HOLDRS are exchange-traded and are priced throughout the trading day just like any other stock so you can buy or sell at any time.

HOLDRS were designed to be a less costly, more tax-efficient way for investors to purchase, hold and transfer securities of selected companies in a particular industry, sector or group.

You retain the voter rights of individual stocks in a HOLDR.

Tax Benefits

The ownership feature of HOLDRS creates powerful tax advantages:

• Avoid embedded capital gains. A recent Morningstar study showed that embedded capital gains represent 34% of net asset value for large index funds with below-average turnover. That means if you purchase one of these index funds, you might eventually have to pay taxes on more than a third of your initial purchase, even though you may have purchased the index fund too late to benefit from the rise in stocks that triggered the tax liability. You can eliminate your exposure to embedded capital gains through the ownership structure of HOLDRS. With HOLDRS, you owe taxes only on gains that occur after you buy your shares. Your capital gain or loss is simply the price at which you sell minus your total investment.

• Limit taxes resulting from turnover. The composition of your HOLDRS doesn’t change, except in special cases like corporate mergers, acquisitions and other specified “Reconstitution Events”. As a result, the buy-and-hold feature of HOLDRS limits taxes resulting from portfolio turnover.

• Control realization of gains and losses. Some investments create tax liabilities that the investor cannot predict or control. With HOLDRS, you control when and how you realize capital gains and losses.

• Personalize tax strategies. With HOLDRS, you can fine-tune your tax exposure easily. You can buy or sell your entire HOLDRS to realize overall gains or losses. Or you can exchange your HOLDRS for the underlying stocks and realize gains and losses in the individual stocks you select. For example, you can take tax losses in any stocks that have declined. HOLDRS are unique in that they allow you to defer taxes on your best-performing stocks indefinitely. And HOLDRS do not cap any big winners.

You should consult your own tax advisor.

Everyone needs utilities. Here is a list of utility funds.

Utility Funds

IDU – Dow Jones U.S. Utilities Sector Index Fund (ETF). The Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones U.S. Utilities Index. 0.48% expense ratio.

XLU – The fund invests in companies involved in water and electrical power and natural gas distribution industries. 0.24% expense ratio.

UTH – Utilities HOLDRS. The trust holds shares of common stock issued by specified companies that, when initially selected, were involved in the utilities industry. No expense ratio.

VPU – Vanguard Utilities (ETF). The fund seeks to track the performance of the MSCI US Investable Market Utilities Index, an index of stocks of large, medium-size, and small U.S. companies within the utilities sector. 0.25% expense ratio.

A smattering of fixed income index funds.

Fixed Income Index Funds

AGG – Aggregate Bond Fund (ETF). Emulates the total United States investment-grade bond market as defined by the Lehman Brothers U.S. Aggregate index. 0.20% expense ratio.

BND – Vanguard Total Bond Market (ETF). Emulates Lehman Brothers Aggregate Bond Index. 0.10% expense ratio.

CSJ – ETF. Emulates Lehman Brothers 1-3 Year U.S. Credit index. 0.20% expense ratio.

IEF – iShares iBoxx $ Investment Grade Corporate Bond Fund (ETF). Tracks intermediate-term sector of the U.S. Treasury market. The Index measures the performance of public obligations of the U.S. Treasury that have a remaining maturity of greater than or equal to 7 years and less than 10 years. 0.15% expense ratio.

LQD – ETF. Tracks U.S. investment-grade corporate bond market as defined by the iBoxx $ Liquid Investment-Grade index. 0.15% expense ratio.

TIP – iShares Barclays TIPS Bond Fund. Tracks inflation-protected sector of the United States Treasury market as defined by the Lehman Brothers U.S. TIPS index. 0.20% expense ratio.

Gold Stocks

ABX – Barrick Gold Corp.
AEM – Agnico-Eagle Mines, Ltd.
AUY – Yamana Gold
GG – Goldcorp, Inc.
GFI – Gold Fields, Ltd.
JAG – Jaguar Mining
NEM – Newmont Mining Corp.
AU – AngloGold Ashanti, Ltd.

Gold Index Funds

GLD – Gold Trust (ETF). Tracks the price of gold bullion. 0.40% expense ratio

GDX – Gold Miners (ETF). 0.55% expense ratio

IAU – Comex Gold Trust (ETF). The Fund seeks to correspond generally to the day-to-day movement of the price of gold bullion. The objective of the Trust is for the value to reflect at any given time the price of gold owned by the Trust at that time less the expenses and liabilities of the Trust. 0.40% expense ratio.

Here is a list of nuclear power index funds:

Nuclear Power Index Funds

• NLR – Nuclear Fund (ETF). Emulates the DAXglobal Nuclear Energy Index. 0.65% expense ratio.
• NUCL – S&P Global Nuclear Index Fund (ETF). Emulates the S&P Global Nuclear Energy Index. 0.48% expense ratio.
• PKN – WNA Nuclear Energy Index (ETF). Emulates the WNA Nuclear Energy Index. 0.75% expense ratio.

External Resources

Website for WNA nuclear energy index. Explains the rational behind the index, its components, and other nuclear power related information.

A list of REIT index funds and ETFs

REIT Index Funds

VNQ – (ETF) Vanguard REIT Index. Emulates Morgan Stanley Capital International (MSCI) US REIT Index. 0.12% expense ratio.
RWR – (ETF) Emulates Dow Jones Wilshire REIT index. 0.25% expense ratio.
IYR – (ETF) Emulates Dow Jones U.S. Real Estate index. 0.48% expense ratio.
ICF – (ETF) Emulates Cohen & Steers Realty Majors index. 0.35% expense ratio.