BUSINESSWEEK ONLINE : NOVEMBER 27, 2000 ISSUE
BUSINESSWEEK INVESTOR For This Tax Break, Should You Hold 'HOLDRS'? If it looks like an exchange-traded fund and acts like an ETF, is it also an ETF for tax purposes? Maybe not. Our story ''Making the Best of Your Clunkers'' (BW--Nov. 13) presented strategies for wringing tax benefits out of your portfolio. One was to sell a losing stock, replace it with a similar ETF, wait 31 days, and reverse the trade--and avoid the Internal Revenue Service's wash-sale rules, which disallow tax-loss deductions if you buy back too soon. The ETF works like a placeholder, keeping you invested in the sector in case there's an interim rally. But the strategy may not pass muster with the IRS if you use one breed of ETF, the HOLDRS. According to Diane Garnick, an equity derivatives strategist at Merrill Lynch, which created HOLDRS, these vehicles are grantor trusts, and legally speaking, the HOLDRS owner owns the underlying stocks in the portfolio. As such, replacing Yahoo! with Internet HOLDRS could be seen as violating the wash-sale rule, at least with the part of the HOLDRS that represents Yahoo!. SPDRs, or ''Spiders,'' and iShares, two other forms of ETFs, don't have this problem since they are organized as investment companies, the same as mutual funds. Three ETF experts BUSINESS WEEK spoke with took issue with Garnick. Al Blomquist, editor of The Weekly Reader, an ETF newsletter, says the HOLDRS trust is a separate security from its underlying holdings. Blomquist, also a financial planner, has clients using them in tax-related sales. Regulation lags innovation, and the tax code does not yet address the HOLDRS. Until the U.S. Tax Court steps in, investors concerned about the HOLDRS' viability as a replacement might use other ETFs. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Staying Out of the Tax Twilight Zone TABLE: ABCs of the AMT For This Tax Break, Should You Hold ``HOLDRS''? INTERACT E-Mail to Business Week Online

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