Upcoming Retail HOLDRs Look Familiar


More and more individual investors are recognizing the benefits that exchange-traded funds (ETFs) and HOLDRs offer as a cheap way to gain exposure to different sectors of the economy. However, as with traditional mutual funds, it's important to examine the stock holdings of an ETF or HOLDRs for overlap if a broadly diversified portfolio is your goal. For example, many investors who sought diversification exclusively through Janus suffered last year because many of the funds in the family held the same tech stocks.

For you sports fans following the NBA Playoffs, imagine the prospect of coaching a team comprised entirely of big, bruising centers cloned from Shaquille O'Neal. Sure, it sounds great - a constant highlight reel of earth-shattering slam-dunks. But talented as he is individually, Shaq relies on the rest of his team and the many "role players" to provide a balanced attack that wins championships. The same line of thinking can be applied when building a diversified portfolio that will stand the test of time and lead you to the promised land of higher returns.

Let's look at an example of stock overlap in an ETF and a HOLDRs.

Merrill Lynch filed with the SEC to launch a new HOLDRs trust based on the retail sector. According to the the prospectus in the S-1 preliminary filing that was submitted on February 2, Retail HOLDRs (proposed ticker: RTH) will invest in "companies that, among other things, sell retail merchandise to consumers through traditional retail stores, the Internet, mail order catalogs and other outlets."

But if you look under the hood at the constituents of this new HOLDRs, you'll find it looks a lot like something that's already out there, namely the Cyclical/Transportation Select SPDR (XLY). The Cyclical/Transportation Select Sector Index includes building materials, retailers, appliances, housewares, air transportation, automotive manufacturing, shipping, and trucking. Of the 20 stocks to be held in Retail HOLDRs, 14 are also held by XLY. Check out the distributions below:

Holding HoldingTicker RTH% XLY%
Wal-Mart Stores Inc
19.85% 20.43%
Home Depot Inc
19.29% 12.06%
Target Corporation
6.30% 4.01%
Lowe's Co Inc
4.47% 2.81%
Gap Inc
4.14% 2.48%
Kohls Corp
4.04% 2.69%
Costco Wholesale Corp
3.43% 2.22%
May Department Stores Co
2.32% 1.40%
Sears Roebuck & Co
2.31% 1.55%
Federated Department Stores Inc
1.81% 1.10%
TJX Companies Inc
1.75% 1.26%
Best Buy Co Inc
1.57% 1.00%
Limited Inc
1.37% 0.90%
RadioShack Corp
1.20% 0.91%

Source: Securities & Exchange Commission,, data as of 3/30/2001

Merrill Lynch is responsible for the stock selection for all HOLDRs and all Select SPDRs. In the case of the Select SPDRs, Merrill selects baskets of stocks from the S&P 500 to represent sectors of the economy.

Although ETFs and HOLDRs can be valuable low-cost tools for the diversified indexer, the above example demonstrates the importance of looking beyond a name. Keep in mind that similar products can sometimes be packaged and marketed in different ways. As a general rule, examining the nuts and bolts of a fund or trust can help prevent repetition in your portfolio, and repetition is the enemy of diversification.