The Semiconductor HOLDR (SMH) is an exchange-traded fund that tracks the performance of a number of major semiconductor producers and suppliers. Included in this fund are Intel (INTC), Texas Instruments (TXN) and Applied Materials (AMAT). Intel comprises more than 23% of the fund's value, while TXN and AMAT each make up about 15% each. The fund's top 10 holdings account for roughly 85% of its value.

In the past, SMH was an extremely volatile fund. In fact, its average daily trading range was nearly 5.5% in 2002. Although SMH still trades with a daily range of about 3%, this is far less volatile than in it has been in past years. Don't let anybody tell you that the stock market has been volatile in 2003, as this trend has been apparent in almost every ETF that I track, as well as in the broad market indices themselves.

SMH is highly correlated with the Nasdaq Composite Index and the Nasdaq-100, with correlation coefficients of greater than 90% relative to these two indices. Surprisingly, the fund's correlation to the Software HOLDR (SWH) is barely over 80%.

Important Reminder: SMH is a HOLDR managed by brokerage giant Merrill Lynch. These types of funds are a bit different from traditional ETFs in the way they trade and in their expense ratios. (There are some other technical issues that you might want to discuss with your tax advisor as well, after you've read the prospectus.) For example, you cannot buy or sell less than 100 shares of a HOLDR in any transaction. However, they are still exempt from the uptick rule (the uptick rule says that you cannot short a stock unless the last price change in the stock was to a higher price).

Unlike most other types of funds, which track broad-based indices that contain hundreds (or some cases even thousands) of stocks, HOLDRS consist of just a handful of stocks and are designed to track particular industry groups. Because they only track a few companies, HOLDRS are very inexpensive to manage. However, because they aren't highly diversified, HOLDRS tend to be much more volatile than the average ETF.

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