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Utilities Becoming Popular Stocks

Utilities Becoming Popular Stocks

Utility stocks have been heating up in recent weeks, and Merrill Lynch is jumping on the bandwagon with a proposal to invest up to $1 billion in a new trading vehicle, Utilities HOLDRS (UTH), a "superstock" made up of the stocks of 20 utility companies.

Enron tops the list of utilities that will comprise the new security with a 9.82% initial weighting, followed by: Duke Energy 9.78%, Williams 8.85%, Southern Co. 8.42%, PG&E 5.3%, El Paso Energy 5.04%, Texas Utilities 4.71%, Unicom 4.63%, FPL Group 4.38%, Dominion Resources 4.19%, Peco Energy 3.94%, Reliant Energy 3.9%, Public Service Enterprise Group 3.75%, Consolidated Edison 3.63%, Edison International 3.47%, American Electric Power 3.45%, Dynegy 3.41%, Entergy 3.28%, Carolina Power & Light 3.09%, FirstEnergy 2.97%. Utilities HOLDRS will be sold on the AMEX, Merrill Lynch (ML) said in its filing last week with the Securities and Exchange Commission (SEC).

Since the early March through April drop in the tech sector, investors seeking more security have driven the Dow Jones Utilities Index up about 18%. Merrill Lynch is catering to investors seeking safety with Utilities HOLDRS (Holding Company Depositary Receipts), as well as with another new securities holding company comprised of regional banks that was filed with the SEC at the same time.

The new offerings will be structured in the much the same way the financial house has set up its nine other 'HOLDRS' sector securities, most of which were comprised of stocks from the high-flying Internet, telecom and biotech industries. ML issued the first of this new type of security, a rival to mutual funds as a means of diversification, in July, 1998.

Unlike mutual funds, shareholders own an interest in the individual companies directly and receive annual and quarterly reports and dividends from the companies. HOLDRS shares can be traded in the secondary market like any other security, except they can only be bought and sold in increments of 100 shares. They have an added redemption feature, however. Investors may cancel their HOLDRS and take possession of the underlying stocks for a fee of no more than 10 cents per HOLDR. This process is not a taxable event. An investor may also invest in the HOLDRS by depositing with the Trustee the required share amounts of the 20 underlying stocks and paying an issuance fee of up to $0.10 per HOLDR to the Trustee. The annual expense for owning existing HOLDRS has been 8 cents per share, or generally less than 0.10%. In the past this expense has been waived to the extent it is not covered by dividends on the underlying stocks.

The units typically have been priced initially at between $90 and $100, but ML has not indicated how the new issues will be priced or when they will be issued. The make-up of the utilities and banks securities have been limited to no more than 10% in any one company, unlike that of ML's most recent launch, Broadband HOLDRS (BDH), in early April in which two companies, Lucent and Nortel Networks, made up 43% of the holdings.

In addition to Broadband HOLDRS, there are HOLDRS securities: Telebras (TBH), Telecom (TTH), Pharmaceutical (PPH), B2B Internet (BHH), Internet Infrastructure (IIH), Internet Architecture (IAH), Biotech (BBH) and Internet (HHH). Most of them have not fared so well in recent weeks. B2B HOLDRS dropped from $113 in early March to the mid thirties last week.

Among utilities mutual funds there have been two stand-outs in year-to-date total returns, according to rankings on www.Morningstar.com. The Galaxy II Utility Index (IUTLX) is up 16.81% and the American Gas Index Fund (GASFX) is up 16.50%. The top holdings for the Galaxy fund are Enron, Duke Energy, Southern Energy, AES Corp. and Williams, Texas Utilities, Edison International, El Paso Energy, PG&E and Public Service Enterprises. The top holdings for the gas index fund are Consolidated Natural Gas, Coastal, Duke, El Paso, Columbia Energy, Williams, PG&E, Enron, Keyspan, and Sempra.

Another gas-heavy fund, which is weighted toward producers, Fidelity Select Natural Gas (FSNGX), has as its top holdings Coastal, Williams, Enron, Burlington Resources, Vastar Resources, BP Amoco, Anadarko Petroleum, Apache, Santa Fe Snyder, and AES, according to Morningstar. It is up 30.82% since the first of the year.

Meanwhile, the American Stock Exchange's Natural Gas Index (^XNG), which is open to options trading, has increased about 50% from the first of the year, going from the high $120s to the $190s last week. Companies comprising the index are Andarko, Apache, Burlington, Consolidated Natural Gas, EEX Corp. Enron Corp. Enron Oil & Gas, Noble Affiliates, Ocean Energy, Oryx Energy, Pogo Producing, Questar Corp., Sonat Inc., Union Pacific Resources, and Williams. The holdings are equally weighted by dollar value, with quarterly revisions to maintain the weighting.

Ellen Beswick

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