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Given the fast pace of innovation on Wall Street, it's inevitable that some older investment products eventually become obsolete and die. In one case, however, what was once a novel investment vehicle won't entirely disappear -- it will just transform into something a lot more familiar to you in today's markets.

Bank of America's (NYSE: BAC  ) Merrill Lynch division said last week that it plans to allow ETF manager Van Eck to take over six members of its HOLDR line of funds. By doing so, a long chapter in exchange-traded fund history will come to an end, along with one of the most bizarre investments available to investors today.

Being a smart shareHOLDR
HOLDRs, short for Holding Company Depository Receipts, first became an option for investors in the late 1990s. At a time when there were far fewer ETFs available to investors, HOLDRs had some interesting attributes. One very useful aspect of HOLDRs comes from its expense structure; shareholders pay $2 per 100 shares quarterly to trustee Bank of New York Mellon (NYSE: BK  ) , regardless of the price of the HOLDRs they own. Therefore, high-priced HOLDRs carry far lower expense ratios than you'll find in most ETFs -- but lower-priced HOLDRs can be so expensive that they are no longer viable investments.

The unique aspect of HOLDRs, however, is how their portfolios stay fixed over time. Most ETFs track indexes that replace securities from time to time, such as when an index component gets taken over or goes bankrupt. But HOLDRs owners get spun-off shares or cash directly in their brokerage accounts as distributions, leaving the HOLDR security itself with a smaller set of holdings.

Dangerous concentration
The net result over time has been for many HOLDRs to have most of their assets in just a few stocks. For instance, rather than buying a biotech HOLDR, you could simply buy shares of Biogen Idec (Nasdaq: BIIB  ) , Gilead Sciences (Nasdaq: GILD  ) , and Amgen (Nasdaq: AMGN  ) , which together compose about 85% of the HOLDR's portfolio. Those aren't bad stocks, but have a HOLDR wrapper around them doesn't make much sense.

Moreover, HOLDRs can't evolve with an industry. So while semiconductor investors might well want shares of Cirrus Logic (Nasdaq: CRUS  ) or TriQuint Semiconductor (Nasdaq: TQNT  ) to take advantage of the popularity of the iPhone, HOLDRs will never own them -- because they're stuck with their current portfolios.

What happens now?
With the move, Van Eck will transform six sets of HOLDRs into exchange-traded funds under its Market Vectors name. The resulting funds will track the 25 largest companies in the oil services, pharma, retail, regional bank, semiconductor, and biotech industries. With expense ratios of 0.35%, they will therefore closely resemble similar sector ETF offerings from SPDR and other ETF providers.

Of course, this leaves an obvious follow-up question: With more HOLDRs still outstanding and not covered by the Van Eck filing, will those eventually see a similar fate? One thing about the Van Eck move is that it's clear the ETF company cherry-picked the top funds; a couple of the taken-over HOLDRs had a half-billion or more in assets under management, while the remaining HOLDRs that Van Eck won't manage are much smaller, with several under the $20 million mark.

Under similar circumstances, other ETF companies have closed down or merged small funds in order to make them more economical. It looks like that's exactly what Merrill plans to do, as it recently filed with the SEC an early termination provision for all of the HOLDRs.

Keep your eyes open
Until now, HOLDRs were much like ETFs in that they gave you an easy way to invest simply. But even simple investments demand your attention from time to time. With the Van Eck move, HOLDRs will become a whole different animal -- and you'll need to consider carefully whether you want to stick with them or move to another similar ETF in the near future.

Make sure you have the best ETFs in your portfolio. The Motley Fool's special free report, "3 ETFs Set to Soar During the Recovery," will show you exactly what you want right now.

Fool contributor Dan Caplinger could probably use a new look. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of TriQuint Semiconductor, Bank of America, and Cirrus Logic, as well as having opened a short position on Bank of America. Motley Fool newsletter services have recommended buying shares of Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is a real looker.

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