You may think that investing in the wide variety of ETFs available like iShares, HOLDRs, SPDRs and others is all the same, but there are differences which can affect you long term.
It may not matter to you if you manage your own money, because you will find out any limitations as you place your order. For example, you can buy any odd number of shares when investing in iShares or SPDRs, but you can’t purchase odd lot shares (less than 100) when using HOLDRs. It has to be a minimum of 100 shares or a multiple thereof.
A problem can occur when you are using an investment manager. How?
He will usually purchase shares based on a percentage allocation of your portfolio. To start, he will place a block trade to purchase a total number of shares for all of his clients that he wants to be invested in a particular HOLDR ETF. He then allocates as per percentages. For example, from the block trade he decides to allocate 10% of portfolio value to your account. Let’s say that represents 187 shares. No problem there.
Let’s assume that you leave this investment manager to continue handling your own investments. One day you decide to sell the 187 shares of the HOLDR ETF. Unfortunately, you will find out that you can’t. To be clear, you can sell 100 shares, but since odd lots are not allowed you will be stuck with the remaining 87 shares.
How do you get around this? Be sure to have your investment manager liquidate any HOLDR ETFs in your portfolio before you depart. He will want to do that anyway, because otherwise, he will be stuck with an odd number.
It pays to know the rules to avoid any unpleasant surprises.
Comments 2
That’s a good piece of information that I hadn’t seen elsewhere! I have owned Holders from time to time, but happened to trade in lots of 100’s so I never encountered the issue. It could come into play in various Bear market strategies that involve reducing holdings across the board by a set percentage to preserve capital, which I’ve been contemplating.
Thanks.
It’s really a surprise when you place a stop loss odd-lot order for a HOLDR ETF, only to find out later, that there was an error with your order and no reason given. Then you have to go through the broker’s front line support who don’t know why the order failed. Time wasted. The broker should have been able to show the error when the order is placed and not accept it, but don’t count on it.