Van Eck begins exchange offer for six Holdrs, swapping for ETFs

By Toni Weeks

San Diego, Nov. 10 - Van Eck Global said it has commenced an exchange offer for six Merrill Lynch-sponsored Holding Company Depositary Receipts, or Holdrs, according to a press release.

Van Eck is offering investors of the Holdrs to exchange their receipts for shares of new Market Vectors exchange-traded funds. The new ETFs are expected to trade under the corresponding Holdrs' ticker symbols.

In the exchange offer,

• The Oil Service Holdrs will be exchanged for the Oil Services ETF, with the U.S. Listed Oil Services 25 index as underlier;

• The Semiconductor Holdrs will be exchanged for the Semiconductor ETF, with the U.S. Listed Semiconductor 25 index as underlier;

• The Pharmaceutical Holdrs will be exchanged for the Pharmaceutical ETF, with the U.S. Listed Pharmaceutical 25 index as underlier;

• The Biotech Holdrs will be exchanged for the Biotech ETF, with the U.S. Listed Biotech 25 index as the underlier;

• The Retail Holdrs will be exchanged for the Retail ETF, with the U.S. Listed Retail 25 index as underlier; and

• The Regional Bank Holdrs will be exchanged for the Regional Bank ETF, with the U.S. Listed Bank and Brokerage 25 index as underlier.

The exchange offers expire at 11 a.m. ET on Dec. 20.

Van Eck believes that ETFs offer a more dynamic, diversified investment vehicle than Holdrs because ETFs are better able to reflect changes in the composition of industry sectors that occur over time, the release said. Holdrs use a depositary trust structure, causing their initial portfolio of securities to remain static over time, whereas ETFs are able to rebalance their portfolios periodically to track an underlying index.

By participating in the exchange offers, Holdrs investors will authorize the sale of securities underlying the tendered Holdrs and the purchase of other securities to conform to a diversified basket of stocks that align with the indexes underlying the new Market Vectors ETFs. Each tendered Holdrs will be exchanged for one share of the new ETF at an equivalent value.

Van Eck is structuring the exchange offers so that a portion of the exchanges will benefit from federal tax-free exchange treatment. But because some securities underlying the Holdrs will be sold for portfolio rebalancing, investors will recognize some taxable gains or losses with respect of the sold securities.

As of Nov. 4, 28% of the Oil Service Holdrs, 42% of the Semiconductor Holdrs, 53% of the Pharmaceutical Holdrs, 62% of the Biotech Holdrs, 26% of the Retail Holdrs and 77% of the Regional Bank Holdrs will be sold in rebalancing transactions.

Trading in the new ETFs is expected to being on the first trading day following the expiration of the exchange offer. Each new ETF will have a net expense ratio of 35 basis points, with expenses capped at 0.35% through April 30, 2013 and possibly longer.

In comparison, Holdrs have a custody fee of $0.02 per share per quarter, which is subtracted from any cash dividends or distributions paid by the underlying securities. While its ETF fees will be higher than those charged for Holdrs, Van Eck said it views the fees as competitive with existing comparable mutual fund and ETF sector products.

The underlying indexes for the new Market Vectors ETFs seek to represent the most liquid stocks within a particular industry and are comprised of the top 25 constituents based on market capitalization and three-month average daily trading volumes. Individual company weightings are capped at 20%. The indexes will be rebalanced semiannually, with weighting caps applied quarterly.

D.F. King & Co., Inc. (800 290-6424) is the information agent for the exchange offer.

Van Eck, an investment management firm focused on global investing, is based in New York.

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