Broadband HOLDRS (BDH)

The highly competitive communication equipments industry is filled with multiple vendors fighting for a concentrated base of telecom service providers. New technologies always pose a threat for them and have gained out of Internet usage that has in turn helped broadband technologies like Digital Subscriber Link, wireless and cable modem. Migration to third generation digital networks would help the wireless industry and new technologies like VOIP, FTTP, IPTV and WiMax would help scaling operations.


Formed under the depositary trust agreement dated 22nd March 2000,Broadband HOLDRS Trust invest in specified companies that develop, manufacture and market products and services, which facilitate the transmission of data, video and voice more quickly and efficiently than traditional telephone line communications. It has net assets worth $125 million and trading at a price to earning multiple hovering around 20.


Top three holdings Qualcomm, Motorola and Corning account for more than 75% of the funds allocation offering less diversification and adding more risk. A second look into the individual prospects of Qualcomm that accounts for 40% of the corpus makes things worse for the fund as it is struggling to enforce its intellectual property rights of CDMA and receiving royalties for the same. With Nokia tying up with Texas Instruments for its CDMA phones and its patent licensing agreement with Qualcomm coming to an end would result in Qualcomm loosing makes share experiencing more stock price volatility.


Semiconductor companies that make chips for the telecom sector also form part of the fund with companies like Broadcom, Conexant Systems, Corning, Jds Uniphase, Mindspeed Technologies, Rf Microdevices and Skyworks. Convergence has become the order of the day and the industry would witness further consolidation in the years to come. The past returns of the funds have not been impressive loosing 19.27% in the pervious year. Moreover its average annualized return for the past three years has been negative of 2.99% with nothing much to cash on in the year 2007.