Utility stocks have been heating up in recent weeks, and MerrillLynch 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 newsecurity with a 9.82% initial weighting, followed by: Duke Energy9.78%, Williams 8.85%, Southern Co. 8.42%, PG&E 5.3%, El PasoEnergy 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%, Dynegy3.41%, Entergy 3.28%, Carolina Power & Light 3.09%, FirstEnergy2.97%. Utilities HOLDRS will be sold on the AMEX, Merrill Lynch(ML) said in its filing last week with the Securities and ExchangeCommission (SEC).

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

The new offerings will be structured in the much the same waythe financial house has set up its nine other ‘HOLDRS’ sectorsecurities, most of which were comprised of stocks from thehigh-flying Internet, telecom and biotech industries. ML issued thefirst of this new type of security, a rival to mutual funds as ameans of diversification, in July, 1998.

Unlike mutual funds, shareholders own an interest in theindividual companies directly and receive annual and quarterlyreports and dividends from the companies. HOLDRS shares can betraded in the secondary market like any other security, except theycan only be bought and sold in increments of 100 shares. They havean added redemption feature, however. Investors may cancel theirHOLDRS and take possession of the underlying stocks for a fee of nomore than 10 cents per HOLDR. This process is not a taxable event.An investor may also invest in the HOLDRS by depositing with theTrustee the required share amounts of the 20 underlying stocks andpaying an issuance fee of up to $0.10 per HOLDR to the Trustee. Theannual expense for owning existing HOLDRS has been 8 cents pershare, or generally less than 0.10%. In the past this expense hasbeen waived to the extent it is not covered by dividends on theunderlying stocks.

The units typically have been priced initially at between $90and $100, but ML has not indicated how the new issues will bepriced or when they will be issued. The make-up of the utilitiesand banks securities have been limited to no more than 10% in anyone company, unlike that of ML’s most recent launch, BroadbandHOLDRS (BDH), in early April in which two companies, Lucent andNortel 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 sowell in recent weeks. B2B HOLDRS dropped from $113 in early Marchto the mid thirties last week.

Among utilities mutual funds there have been two stand-outs inyear-to-date total returns, according to rankings onwww.Morningstar.com. The Galaxy II Utility Index (IUTLX) is up16.81% and the American Gas Index Fund (GASFX) is up 16.50%. Thetop holdings for the Galaxy fund are Enron, Duke Energy, SouthernEnergy, AES Corp. and Williams, Texas Utilities, EdisonInternational, El Paso Energy, PG&E and Public ServiceEnterprises. The top holdings for the gas index fund areConsolidated 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 holdingsCoastal, 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 theyear.

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 $190slast week. Companies comprising the index are Andarko, Apache,Burlington, Consolidated Natural Gas, EEX Corp. Enron Corp. EnronOil & Gas, Noble Affiliates, Ocean Energy, Oryx Energy, PogoProducing, Questar Corp., Sonat Inc., Union Pacific Resources, andWilliams. The holdings are equally weighted by dollar value, withquarterly revisions to maintain the weighting.

Ellen Beswick

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