Exchange-traded funds have come a long way in the past 10 years. But it took even longer than that for one popular class of funds to make some much-needed changes. Now, though, these newly renovated ETFs are in a much better position to use their reputation to challenge their competitors.
Later in this article, I'll explain why these ETFs may make good investments now. But first, let's take a closer look at these ETFs and what they looked like before this big change, so that you can better understand just why the new versions are such a big improvement.
Are HOLDRs worth holding?
The redone ETFs are all known as HOLDRs, or Holding Company Depository Receipts. As one of the first available types of ETFs, HOLDRs came out in the late 1990s. At the time, they were a viable way to make bets on particular sectors, with holdings that fairly represented entire industries. In addition, because of their fixed-price fee structure -- a straight $2 per quarter for every 100 shares you owned -- some high-priced HOLDRs were extremely cost-effective ways to get tailored sector exposure.
But the aspect of HOLDRs that eventually led to their needing a big restructuring was that they didn't reinvest dividends or replace companies that had failed, been acquired, or split up into different stocks. Instead, HOLDRs kept their portfolios static. They ended up paying out any dividends, spun-off shares, and buyout proceeds directly to their shareholders.
As a result, for many HOLDRs, the number of holdings steadily shrank over the years. In some cases, the HOLDRs portfolios got absurd:
With the Biotech HOLDR (NYS: BBH) , three-quarters of its assets were in just three stocks: Amgen (NAS: AMGN) , Gilead Sciences (NAS: GILD) , and Biogen Idec. Admittedly, those stocks are biotech giants, but having them completely overwhelm their competitors left shareholders highly concentrated.
With the Internet Infrastructure HOLDR, Akamai Technologies (NAS: AKAM) and Verisign made up 80%.
Perhaps the funniest story came from the B2B Internet HOLDR, which by its end held only two stocks: Ariba and Internet Capital Group.
The new HOLDRs
Now, though, the new HOLDRs look a lot like regular ETFs. Earlier this year, ETF provider Van Eck announced that it would take control of six of the HOLDRs and add them to its Market Vectors ETF line. Through a voluntary tender, existing shareholders could choose shares of new ETFs that matched up with the various HOLDRs categories, including semiconductor makers, pharmaceutical companies, retail stocks, and regional banks.
A look at the new ETFs' holdings reveals how much more balanced they are. Although those big stocks listed above are still near the top of the holding lists, they represent a far smaller percentage of assets, leaving more room for up-and-coming stocks to play at least a supporting role in the total return for the funds.
At 0.35%, the annual expense ratio for the new HOLDRs is reasonably competitive with other industry-specific ETFs. You can find broader-based sector ETFs that charge less, but they don't let you drill down as narrowly on the exact stocks you want for your portfolio.
Get the exposure you want
With the new versions of HOLDRs now trading, you can now evaluate them the same way you do any other ETF: by considering factors including cost, investment strategy, liquidity, and the particular index each ETF tracks. Although they've lost their historically unique nature from the last century, the new-millennium update of HOLDRs may be exactly the tool you're looking for to add exposure to particular industries to your investments.
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At the time thisarticle was published Fool contributor Dan Caplinger appreciates when things get better. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy makes all the right moves.
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