UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-21611
Name of Fund: S&P 500(R) GEARED(SM) Fund Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Mitchell M. Cox, Chief Executive Officer,
S&P 500(R) GEARED(SM) Fund Inc., 4 World Financial Center, 5th Floor, New
York, New York 10080. Mailing address: P.O. Box 9011, Princeton, NJ
08543-9011
Registrant's telephone number, including area code: (212) 449-8118
Date of fiscal year end: 12/31/06
Date of reporting period: 01/01/06 - 06/30/06
Item 1 - Report to Stockholders
S&P 500(R) GEARED(SM) Fund Inc.
Semi-Annual Report
June 30, 2006
[LOGO] IQ INVESTMENT [LOGO] Merrill Lynch Investment Managers
ADVISORS
S&P 500(R) GEARED(SM) Fund Inc.
Proxy Results
During the six-month period ended June 30, 2006, S&P 500(R) GEARED(SM) Fund
Inc.'s shareholders voted on the following proposal. The proposal was approved
at a shareholders' meeting on April 27, 2006. A description of the proposal and
number of shares voted are as follows:
- ---------------------------------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
- ---------------------------------------------------------------------------------------------------------
1. To elect the Fund's Board of Directors: Alan R. Batkin 4,978,397 196,544
Andrew J. Donohue 4,978,983 195,958
Paul Glasserman 4,978,983 195,958
Steven W. Kohlhagen 4,979,783 195,158
William J. Rainer 4,979,783 195,158
- ---------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Andrew J. Donohue gave notice to the Fund and the Advisor of his intention to
resign his positions as a Director and Officer of the Fund and as an Officer of
the Advisor in May 2006 in order to assume the role of director of the
Securities and Exchange Commission's Division of Investment Management.
- --------------------------------------------------------------------------------
Officers and Directors
Alan R. Batkin, Director and Chairman of the Board
Paul Glasserman, Director and Chairman of the Audit Committee
Steven W. Kohlhagen, Director
William J. Rainer, Director and Chairman of the Nominating and Corporate
Governance Committee
Mitchell M. Cox, President
Donald C. Burke, Vice President, Treasurer and Secretary
Martin G. Byrne, Chief Legal Officer
Jeffrey Hiller, Chief Compliance Officer
Justin C. Ferri, Vice President
Jay M. Fife, Vice President
Colleen R. Rusch, Vice President
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agent
The Bank of New York
101 Barclay Street -- 11 East
New York, NY 10286
NYSE Symbol
GRE
"S&P 500" and "Standard & Poor's 500" are registered trademarks of the
McGraw-Hill Companies.
"GEARED" and "Geared-Equity Accelerated Return"are service marks of Merrill
Lynch & Co.
2 S&P 500(R) GEARED(SM) FUND INC. JUNE 30, 2006
A Discussion With Your Fund's Portfolio Managers
We are pleased to provide you with this shareholder report for S&P 500(R)
GEARED(SM) Fund Inc. While the Fund is advised by IQ Investment Advisors LLC,
the following discussion is provided by Merrill Lynch Investment Managers, LP,
the Fund's subadviser.
How did the Fund perform during the six-month period?
The investment objective of S&P 500(R) GEARED(SM) Fund Inc. (the "Fund") is to
provide total returns, exclusive of fees and expenses of the Fund, linked to the
annual performance of the Standard and Poor's 500(R) Composite Stock Price Index
(the "S&P 500 Index" or the "Index"). Where the Index has negative returns for
an annual period (approximately one year), the Fund seeks to provide annual
price returns that track the performance of the Index on a one-for-one basis
over the annual period. Where the performance of the Index is positive for an
annual period, the Fund seeks to deliver a "geared" return equal to
approximately three times the annual price returns of the Index up to a maximum
index participation level.
For the six-month period ended June 30, 2006, the Common Stock of the Fund had a
total investment return of +4.37%, based on a change in per share net asset
value from $19.66 to $20.52. The Fund's unmanaged benchmark, the S&P 500 Index,
returned +2.71% (including dividend reinvestment) for the same period. The
Fund's current options will expire on November 3, 2006.
For a description of the Fund's total investment return based on a change in per
share market value of the Fund's Common Stock (as measured by the trading price
of the Fund's shares on the New York Stock Exchange), and assuming reinvestment
of dividends, please refer to the Financial Highlights section of this report.
As a closed-end fund, the Fund's shares may trade in the secondary market at a
premium or a discount to the Fund's net asset value. As a result, total
investment returns based on changes in the market value of the Fund's Common
Stock can vary significantly from total investment returns based on changes in
the Fund's net asset value.
Describe the market environment during the six-month period.
The U.S. economy began its fifth year of expansion with an impressive first
quarter. Equity markets trumped the preceding period's gains, delivering the
best first quarter in several years. The impetus behind the U.S. market climb in
the first quarter was strong U.S. economic data. Economic growth resiliently
forged ahead despite well-publicized headwinds such as rising interest rates, a
slowdown in the housing market and wild cards such as turbulence in the Middle
East and volatile energy markets.
The second quarter began a difficult period for investors, with most U.S. equity
markets posting losses. As was the case in the first quarter, market volatility
continued throughout the second quarter, but this time leaning in a negative
direction. Profit taking and concerns over the medium-term strength of the
economy weighed on stock prices. Moreover, U.S. equity markets came under
pressure from higher interest rates, rising inflation, a weakening in personal
consumption and the housing market, record energy prices and ongoing concern
about the levels of consumer debt.
How did you manage the portfolio during the six-month period?
On November 2, 2005, the Fund's options expired and were reset to November 3,
2006 expiration, bringing the maximum return cap to approximately 13%. At the
reset of the Fund, we negotiated over-the-counter option transactions, selling
three out-of-the-money call options and purchasing two at-the-money call
options. We utilized this options strategy to provide the three-to-one upside
potential to the annual maximum return cap.
How would you characterize the Fund's position at the close of the six-month
period?
The Fund is positioned to provide accelerated growth relative to any potential
upward movement in the S&P 500 Index, up to the annual maximum return cap. The
S&P 500 Index provides diversified exposure to the securities of the largest
U.S. publicly traded companies. Given the Fund's investment process and current
positions, we believe the Fund is well positioned to meet its objective.
S&P 500(R) GEARED(SM) FUND INC. JUNE 30, 2006 3
A Discussion With Your Fund's Portfolio Managers (concluded)
How will the transaction between Merrill Lynch Investment Managers, LP ("MLIM")
and BlackRock, Inc. affect the management of the Fund?
IQ Investment Advisors and MLIM are both subsidiaries of Merrill Lynch & Co.,
Inc. ("Merrill Lynch"). Merrill Lynch and BlackRock, Inc. have agreed to a
transaction to combine MLIM and certain affiliates with BlackRock, Inc. to form
a new asset management company. The transaction does not involve IQ Investment
Advisors, which will remain a subsidiary of Merrill Lynch. The transaction, when
it is consummated, will cause the Fund's Investment Subadvisory Agreements with
MLIM to automatically terminate. The Fund has issued a proxy statement to
stockholders requesting their approval of a new subadvisory agreement. As
discussed in the proxy statement, the MLIM portfolio management team that
currently services the Fund is not expected to change as a result of the
transaction. Because each stockholder's vote is important, the stockholders of
the Fund are encouraged to vote their shares.
Jonathan Clark
Portfolio Manager
Debra L. Jelilian
Portfolio Manager
Jeffrey L. Russo, CFA
Portfolio Manager
July 18, 2006
Portfolio Information
As of June 30, 2006
Percent of
Ten Largest Equity Holdings Net Assets
- --------------------------------------------------------------------------------
Exxon Mobil Corp. .......................................... 3.0%
General Electric Co. ....................................... 2.8
Citigroup, Inc. ............................................ 2.0
Bank of America Corp. ...................................... 1.8
Microsoft Corp. ............................................ 1.7
The Procter & Gamble Co. ................................... 1.5
Johnson & Johnson .......................................... 1.4
Pfizer, Inc. ............................................... 1.4
Altria Group, Inc. ......................................... 1.2
American International Group, Inc. ......................... 1.2
- --------------------------------------------------------------------------------
Percent of
Five Largest Industries Net Assets
- --------------------------------------------------------------------------------
Oil, Gas & Consumable Fuels ................................ 7.6%
Pharmaceuticals ............................................ 6.0
Diversified Financial Services ............................. 5.1
Insurance .................................................. 4.4
Commercial Banks ........................................... 4.0
- --------------------------------------------------------------------------------
Percent of
S&P 500 Index Sector Weightings Total Investments
- --------------------------------------------------------------------------------
Financials ................................................. 19.8%
Information Technology ..................................... 13.7
Health Care ................................................ 11.3
Industrials ................................................ 10.9
Consumer Discretionary ..................................... 9.4
Energy ..................................................... 9.4
Consumer Staples ........................................... 8.9
Utilities .................................................. 3.1
Telecommunication Services ................................. 3.1
Materials .................................................. 2.8
Other* ..................................................... 7.6
- --------------------------------------------------------------------------------
* Includes portfolio holdings in short-term investments and options.
For Fund compliance purposes, the Fund's industry and sector
classifications refer to any one or more of the industry and sector
sub-classifications used by one or more widely recognized market indexes
or ratings group indexes, and/or as defined by Fund management. This
definition may not apply for purposes of this report, which may combine
industry and sector sub-classifications for reporting ease.
4 S&P 500(R) GEARED(SM) FUND INC. JUNE 30, 2006
Schedule of Investments
Shares
Industry Common Stocks Held Value
===================================================================================
Aerospace & Defense--2.3%
Boeing Co. 7,100 $ 581,561
General Dynamics Corp. 3,400 222,564
Goodrich Corp. 1,200 48,348
Honeywell International, Inc. 7,300 294,190
L-3 Communications Holdings, Inc. 1,078 81,303
Lockheed Martin Corp. 3,100 222,394
Northrop Grumman Corp. 3,000 192,180
Raytheon Co. 4,100 182,737
Rockwell Collins, Inc. 1,700 94,979
United Technologies Corp. 8,900 564,438
------------
2,484,694
- -----------------------------------------------------------------------------------
Air Freight & Logistics--1.0%
FedEx Corp. 2,600 303,836
United Parcel Service, Inc. Class B 9,700 798,601
------------
1,102,437
- -----------------------------------------------------------------------------------
Airlines--0.1%
Southwest Airlines Co. 6,300 103,131
- -----------------------------------------------------------------------------------
Auto Components--0.1%
Cooper Tire & Rubber Co. 300 3,342
The Goodyear Tire & Rubber Co. (a) 1,300 14,430
Johnson Controls, Inc. 1,600 131,552
------------
149,324
- -----------------------------------------------------------------------------------
Automobiles--0.3%
Ford Motor Co. 15,500 107,415
General Motors Corp. 4,800 142,992
Harley-Davidson, Inc. 2,300 126,247
------------
376,654
- -----------------------------------------------------------------------------------
Beverages--2.0%
Anheuser-Busch Cos., Inc. 6,600 300,894
Brown-Forman Corp. Class B 800 57,160
The Coca-Cola Co. 18,100 778,662
Coca-Cola Enterprises, Inc. 2,900 59,073
Constellation Brands, Inc. Class A (a) 1,900 47,500
Molson Coors Brewing Co. Class B 600 40,728
Pepsi Bottling Group, Inc. 1,400 45,010
PepsiCo, Inc. 14,500 870,580
------------
2,199,607
- -----------------------------------------------------------------------------------
Biotechnology--1.1%
Amgen, Inc. (a) 10,200 665,346
Biogen Idec, Inc. (a) 2,900 134,357
Genzyme Corp. (a) 2,200 134,310
Gilead Sciences, Inc. (a) 4,000 236,640
Medimmune, Inc. (a) 2,000 54,200
------------
1,224,853
- -----------------------------------------------------------------------------------
Building Products--0.2%
American Standard Cos., Inc. 1,400 60,578
Masco Corp. 3,500 103,740
------------
164,318
- -----------------------------------------------------------------------------------
Capital Markets--3.2%
Ameriprise Financial, Inc. 2,020 90,233
The Bank of New York Co., Inc. 6,600 212,520
The Bear Stearns Cos., Inc. 900 126,072
The Charles Schwab Corp. 9,300 148,614
E*Trade Financial Corp. (a) 3,400 77,588
Federated Investors, Inc. Class B 900 28,350
Franklin Resources, Inc. 1,200 104,172
Goldman Sachs Group, Inc. 3,800 571,634
Janus Capital Group, Inc. 2,200 39,380
Legg Mason, Inc. 1,000 99,520
Lehman Brothers Holdings, Inc. 4,600 299,690
Mellon Financial Corp. 3,800 130,834
Merrill Lynch & Co., Inc. (b) 8,100 563,436
Morgan Stanley 9,600 606,816
Northern Trust Corp. 1,500 82,950
State Street Corp. 2,800 162,652
T. Rowe Price Group, Inc. 2,400 90,744
------------
3,435,205
- -----------------------------------------------------------------------------------
Chemicals--1.4%
Air Products & Chemicals, Inc. 1,800 115,056
Ashland, Inc. 600 40,020
The Dow Chemical Co. 8,300 323,949
E.I. du Pont de Nemours & Co. 7,800 324,480
Eastman Chemical Co. 600 32,400
Ecolab, Inc. 1,800 73,044
Hercules, Inc. (a) 1,000 15,260
International Flavors & Fragrances, Inc. 900 31,716
Monsanto Co. 2,300 193,637
PPG Industries, Inc. 1,400 92,400
Praxair, Inc. 2,900 156,600
Rohm & Haas Co. 1,100 55,132
Sigma-Aldrich Corp. 700 50,848
------------
1,504,542
- -----------------------------------------------------------------------------------
Commercial Banks--4.0%
AmSouth Bancorp 3,300 87,285
BB&T Corp. 4,600 191,314
Comerica, Inc. 1,300 67,587
Commerce Bancorp, Inc. 1,600 57,072
Compass Bancshares, Inc. 1,251 69,556
Fifth Third Bancorp 4,700 173,665
First Horizon National Corp. 900 36,180
Huntington Bancshares, Inc. 2,500 58,950
KeyCorp 3,800 135,584
M&T Bank Corp. 800 94,336
Marshall & Ilsley Corp. 1,900 86,906
National City Corp. 4,700 170,093
North Fork Bancorp., Inc. 3,900 117,663
PNC Financial Services Group, Inc. 2,400 168,408
Regions Financial Corp. 4,200 139,104
SunTrust Banks, Inc. 3,100 236,406
Synovus Financial Corp. 2,900 77,662
U.S. Bancorp 16,100 497,168
Wachovia Corp. 14,300 773,344
Wells Fargo & Co. 14,700 986,076
Zions Bancorp. 900 70,146
------------
4,294,505
- -----------------------------------------------------------------------------------
Commercial Services & Supplies--0.7%
Allied Waste Industries, Inc. (a) 2,200 24,992
Avery Dennison Corp. 1,100 63,866
Cendant Corp. 8,800 143,352
Cintas Corp. 1,300 51,688
Equifax, Inc. 1,300 44,642
Monster Worldwide, Inc. (a) 1,000 42,660
Pitney Bowes, Inc. 2,100 86,730
RR Donnelley & Sons Co. 2,000 63,900
Robert Half International, Inc. 1,600 67,200
Waste Management, Inc. 4,700 168,636
------------
757,666
S&P 500(R) GEARED(SM) FUND INC. JUNE 30, 2006 5
Schedule of Investments (continued)
Shares
Industry Common Stocks Held Value
===================================================================================
Communications Equipment--2.6%
ADC Telecommunications, Inc. (a) 828 $ 13,960
Andrew Corp. (a) 1,600 14,176
Avaya, Inc. (a) 3,900 44,538
Ciena Corp. (a) 3,500 16,835
Cisco Systems, Inc. (a) 53,800 1,050,714
Comverse Technology, Inc. (a) 1,900 37,563
Corning, Inc. (a) 13,100 316,889
JDS Uniphase Corp. (a) 12,600 31,878
Juniper Networks, Inc. (a) 5,000 79,950
Lucent Technologies, Inc. (a) 37,600 90,992
Motorola, Inc. 21,500 433,225
QUALCOMM, Inc. 14,500 581,015
Tellabs, Inc. (a) 3,400 45,254
------------
2,756,989
- -----------------------------------------------------------------------------------
Computers & Peripherals--3.2%
Apple Computer, Inc. (a) 7,300 416,976
Dell, Inc. (a) 19,800 483,318
EMC Corp. (a) 20,700 227,079
Gateway, Inc. (a) 3,400 6,460
Hewlett-Packard Co. 25,100 795,168
International Business Machines Corp. 13,900 1,067,798
Lexmark International, Inc. Class A (a) 900 50,247
NCR Corp. (a) 1,700 62,288
Network Appliance, Inc. (a) 3,100 109,430
QLogic Corp. (a) 1,400 24,136
Sandisk Corp. (a) 1,600 81,568
Sun Microsystems, Inc. (a) 28,700 119,105
------------
3,443,573
- -----------------------------------------------------------------------------------
Construction & Engineering--0.1%
Fluor Corp. 800 74,344
- -----------------------------------------------------------------------------------
Construction Materials--0.1%
Vulcan Materials Co. 1,000 78,000
- -----------------------------------------------------------------------------------
Consumer Finance--0.9%
American Express Co. 10,800 574,776
Capital One Financial Corp. 2,700 230,715
SLM Corp. 3,700 195,804
------------
1,001,295
- -----------------------------------------------------------------------------------
Containers & Packaging--0.2%
Ball Corp. 1,100 40,744
Bemis Co. 1,000 30,620
Pactiv Corp. (a) 1,500 37,125
Sealed Air Corp. 800 41,664
Temple-Inland, Inc. 1,100 47,157
------------
197,310
- -----------------------------------------------------------------------------------
Distributors--0.1%
Genuine Parts Co. 1,700 70,822
- -----------------------------------------------------------------------------------
Diversified Consumer Services--0.1%
Apollo Group, Inc. Class A (a) 1,200 62,004
H&R Block, Inc. 3,000 71,580
------------
133,584
- -----------------------------------------------------------------------------------
Diversified Financial Services--5.1%
Bank of America Corp. 40,059 1,926,838
CIT Group, Inc. 1,700 88,893
Citigroup, Inc. 43,900 2,117,736
JPMorgan Chase & Co. 30,500 1,281,000
Moody's Corp. 2,300 125,258
------------
5,539,725
- -----------------------------------------------------------------------------------
Diversified Telecommunication Services--2.5%
AT&T, Inc. 34,689 967,476
BellSouth Corp. 15,700 568,340
CenturyTel, Inc. 1,100 40,865
Citizens Communications Co. 3,500 45,675
Embarq Corp. (a) 1,282 52,549
Qwest Communications International
Inc. (a) 13,900 112,451
Verizon Communications, Inc. 25,600 857,344
------------
2,644,700
- -----------------------------------------------------------------------------------
Electric Utilities--1.4%
Allegheny Energy, Inc. (a) 1,500 55,605
American Electric Power Co., Inc. 3,200 109,600
Edison International 3,000 117,000
Entergy Corp. 1,700 120,275
Exelon Corp. 5,900 335,297
FPL Group, Inc. 3,300 136,554
FirstEnergy Corp. 2,700 146,367
PPL Corp. 3,500 113,050
Pinnacle West Capital Corp. 1,000 39,910
Progress Energy, Inc. 2,300 98,601
The Southern Co. 6,300 201,915
------------
1,474,174
- -----------------------------------------------------------------------------------
Electrical Equipment--0.5%
American Power Conversion Corp. 1,700 33,133
Cooper Industries Ltd. Class A 900 83,628
Emerson Electric Co. 3,500 293,335
Rockwell Automation, Inc. 1,700 122,417
------------
532,513
- -----------------------------------------------------------------------------------
Electronic Equipment & Instruments--0.3%
Agilent Technologies, Inc. (a) 4,119 129,996
Jabil Circuit, Inc. 1,600 40,960
Molex, Inc. 1,500 50,355
Sanmina-SCI Corp. (a) 4,900 22,540
Solectron Corp. (a) 9,300 31,806
Symbol Technologies, Inc. 2,400 25,896
Tektronix, Inc. 900 26,478
------------
328,031
- -----------------------------------------------------------------------------------
Energy Equipment & Services--1.8%
BJ Services Co. 2,900 108,054
Baker Hughes, Inc. 2,800 229,180
Halliburton Co. 4,500 333,945
Nabors Industries Ltd. (a) 2,600 87,854
National Oilwell Varco, Inc. (a) 1,607 101,755
Noble Corp. 1,100 81,862
Rowan Cos., Inc. 800 28,472
Schlumberger Ltd. 10,200 664,122
Transocean, Inc. (a) 2,800 224,896
Weatherford International Ltd. (a) 2,200 109,164
------------
1,969,304
- -----------------------------------------------------------------------------------
Food & Staples Retailing--2.3%
CVS Corp. 6,900 211,830
Costco Wholesale Corp. 4,000 228,520
The Kroger Co. 6,500 142,090
SUPERVALU Inc. 1,846 56,672
SYSCO Corp. 5,300 161,968
Safeway, Inc. 4,100 106,600
6 S&P 500(R) GEARED(SM) FUND INC. JUNE 30, 2006
Schedule of Investments (continued)
Shares
Industry Common Stocks Held Value
===================================================================================
Food & Staples Retailing (concluded)
Wal-Mart Stores, Inc. 21,800 $ 1,050,106
Walgreen Co. 8,800 394,592
Whole Foods Market, Inc. 1,200 77,568
------------
2,429,946
- -----------------------------------------------------------------------------------
Food Products--1.1%
Archer Daniels Midland Co. 5,500 227,040
Campbell Soup Co. 1,800 66,798
ConAgra Foods, Inc. 4,200 92,862
Dean Foods Co. (a) 1,200 44,628
General Mills, Inc. 3,100 160,146
HJ Heinz Co. 2,800 115,416
The Hershey Co. 1,700 93,619
Kellogg Co. 2,400 116,232
McCormick & Co., Inc. 1,300 43,615
Sara Lee Corp. 7,200 115,344
Tyson Foods, Inc. Class A 2,500 37,150
Wm. Wrigley Jr. Co. 2,125 96,390
------------
1,209,240
- -----------------------------------------------------------------------------------
Gas Utilities--0.0%
Nicor, Inc. 200 8,300
Peoples Energy Corp. 200 7,182
------------
15,482
- -----------------------------------------------------------------------------------
Health Care Equipment & Supplies--1.5%
Bausch & Lomb, Inc. 400 19,616
Baxter International, Inc. 5,600 205,856
Becton Dickinson & Co. 2,300 140,599
Biomet, Inc. 2,000 62,580
Boston Scientific Corp. (a) 10,171 171,279
CR Bard, Inc. 1,000 73,260
Hospira, Inc. (a) 1,500 64,410
Medtronic, Inc. 10,500 492,660
St. Jude Medical, Inc. (a) 3,300 106,986
Stryker Corp. 2,600 109,486
Zimmer Holdings, Inc. (a) 2,100 119,112
------------
1,565,844
- -----------------------------------------------------------------------------------
Health Care Providers & Services--2.5%
Aetna, Inc. 5,000 199,650
AmerisourceBergen Corp. 1,600 67,072
Cardinal Health, Inc. 3,800 244,454
Caremark Rx, Inc. 4,000 199,480
Cigna Corp. 1,100 108,361
Coventry Health Care, Inc. (a) 1,350 74,169
Express Scripts, Inc. (a) 1,200 86,088
HCA, Inc. 3,390 146,279
Health Management Associates, Inc.
Class A 1,900 37,449
Humana, Inc. (a) 1,300 69,810
Laboratory Corp. of America Holdings (a) 1,300 80,899
Manor Care, Inc. 600 28,152
McKesson Corp. 2,800 132,384
Medco Health Solutions, Inc. (a) 2,600 148,928
Quest Diagnostics, Inc. 1,600 95,872
Tenet Healthcare Corp. (a) 4,400 30,712
UnitedHealth Group, Inc. 11,100 497,058
WellPoint, Inc. (a) 5,800 422,066
------------
2,668,883
- -----------------------------------------------------------------------------------
Health Care Technology--0.0%
IMS Health, Inc. 2,000 53,700
- -----------------------------------------------------------------------------------
Hotels, Restaurants & Leisure--1.4%
Carnival Corp. 3,600 150,264
Darden Restaurants, Inc. 1,200 47,280
Harrah's Entertainment, Inc. 1,500 106,770
Hilton Hotels Corp. 2,600 73,528
International Game Technology 3,100 117,614
Marriott International, Inc. Class A 2,800 106,736
McDonald's Corp. 10,700 359,520
Starbucks Corp. (a) 6,500 245,440
Starwood Hotels & Resorts Worldwide, Inc. 1,800 108,612
Wendy's International, Inc. 900 52,461
Yum! Brands, Inc. 2,400 120,648
------------
1,488,873
- -----------------------------------------------------------------------------------
Household Durables--0.6%
Black & Decker Corp. 600 50,676
Centex Corp. 1,100 55,330
DR Horton, Inc. 2,500 59,550
Fortune Brands, Inc. 1,200 85,212
Harman International Industries, Inc. 500 42,685
KB HOME 600 27,510
Leggett & Platt, Inc. 1,800 44,964
Lennar Corp. Class A 1,097 48,674
Newell Rubbermaid, Inc. 2,200 56,826
Pulte Homes, Inc. 1,900 54,701
Snap-On, Inc. 600 24,252
The Stanley Works 800 37,776
Whirlpool Corp. 707 58,434
------------
646,590
- -----------------------------------------------------------------------------------
Household Products--2.0%
Clorox Co. 1,200 73,164
Colgate-Palmolive Co. 4,400 263,560
Kimberly-Clark Corp. 4,000 246,800
The Procter & Gamble Co. 29,002 1,612,511
------------
2,196,035
- -----------------------------------------------------------------------------------
IT Services--0.9%
Affiliated Computer Services, Inc.
Class A (a) 1,000 51,610
Automatic Data Processing, Inc. 4,900 222,215
Computer Sciences Corp. (a) 1,500 72,660
Convergys Corp. (a) 1,400 27,300
Electronic Data Systems Corp. 4,700 113,082
First Data Corp. 6,600 297,264
Fiserv, Inc. (a) 1,500 68,040
Paychex, Inc. 2,800 109,144
Sabre Holdings Corp. Class A 1,400 30,800
Unisys Corp. (a) 3,500 21,980
------------
1,014,095
- -----------------------------------------------------------------------------------
Independent Power Producers & Energy Traders--0.4%
The AES Corp. (a) 5,900 108,855
Constellation Energy Group, Inc. 1,700 92,684
Dynegy, Inc. Class A (a) 3,200 17,504
TXU Corp. 4,000 239,160
------------
458,203
- -----------------------------------------------------------------------------------
Industrial Conglomerates--3.9%
3M Co. 6,700 541,159
General Electric Co. 91,500 3,015,840
Textron, Inc. 1,100 101,398
Tyco International Ltd. 17,800 489,500
------------
4,147,897
S&P 500(R) GEARED(SM) FUND INC. JUNE 30, 2006 7
Schedule of Investments (continued)
Shares
Industry Common Stocks Held Value
===================================================================================
Insurance--4.4%
ACE Ltd. 2,600 $ 131,534
AMBAC Financial Group, Inc. 1,000 81,100
AON Corp. 2,800 97,496
Aflac, Inc. 4,500 208,575
The Allstate Corp. 5,600 306,488
American International Group, Inc. 22,700 1,340,435
Chubb Corp. 3,400 169,660
Cincinnati Financial Corp. 1,690 79,447
Genworth Financial, Inc. Class A 3,200 111,488
Hartford Financial Services Group, Inc. 2,500 211,500
Lincoln National Corp. 2,768 156,226
Loews Corp. 3,600 127,620
MBIA, Inc. 1,300 76,115
Marsh & McLennan Cos., Inc. 4,800 129,072
MetLife, Inc. 6,500 332,865
Principal Financial Group, Inc. 2,600 144,690
The Progressive Corp. 6,800 174,828
Prudential Financial, Inc. 4,400 341,880
Safeco Corp. 1,200 67,620
The St. Paul Travelers Cos., Inc. 6,200 276,396
Torchmark Corp. 1,000 60,720
UnumProvident Corp. 2,800 50,764
XL Capital Ltd. Class A 1,400 85,820
------------
4,762,339
- -----------------------------------------------------------------------------------
Internet & Catalog Retail--0.1%
Amazon.com, Inc. (a) 2,700 104,436
- -----------------------------------------------------------------------------------
Internet Software & Services--1.3%
eBay, Inc. (a) 10,000 292,900
Google, Inc. Class A (a) 1,740 729,634
VeriSign, Inc. (a) 2,200 50,974
Yahoo!, Inc. (a) 10,800 356,400
------------
1,429,908
- -----------------------------------------------------------------------------------
Leisure Equipment & Products--0.2%
Brunswick Corp. 700 23,275
Eastman Kodak Co. 2,300 54,694
Hasbro, Inc. 1,800 32,598
Mattel, Inc. 3,800 62,738
------------
173,305
- -----------------------------------------------------------------------------------
Life Sciences Tools & Services--0.3%
Applera Corp.--Applied
Biosystems Group 1,900 61,465
Fisher Scientific International (a) 1,000 73,050
Millipore Corp. (a) 500 31,495
PerkinElmer, Inc. 1,300 27,170
Thermo Electron Corp. (a) 1,600 57,984
Waters Corp. (a) 1,100 48,840
------------
300,004
- -----------------------------------------------------------------------------------
Machinery--1.5%
Caterpillar, Inc. 5,800 431,984
Cummins, Inc. 400 48,900
Danaher Corp. 2,100 135,072
Deere & Co. 2,000 166,980
Dover Corp. 1,900 93,917
Eaton Corp. 1,400 105,560
ITT Corp. 1,400 69,300
Illinois Tool Works, Inc. 3,400 161,500
Ingersoll-Rand Co. Class A 3,100 132,618
Navistar International Corp. (a) 700 17,227
PACCAR, Inc. 1,600 131,808
Pall Corp. 1,300 36,400
Parker Hannifin Corp. 1,100 85,360
------------
1,616,626
- -----------------------------------------------------------------------------------
Media--3.2%
CBS Corp. Class B 6,750 182,588
Clear Channel Communications, Inc. 4,900 151,655
Comcast Corp. Class A (a) 19,100 625,334
Dow Jones & Co., Inc. 400 14,004
EW Scripps Co. Class A 700 30,198
Gannett Co., Inc. 2,000 111,860
Interpublic Group of Cos., Inc. (a) 3,200 26,720
The McGraw-Hill Cos., Inc. 3,400 170,782
Meredith Corp. 400 19,816
New York Times Co. Class A 1,100 26,994
News Corp. Class A 21,700 416,206
Omnicom Group 1,500 133,635
Time Warner, Inc. 38,000 657,400
Tribune Co. 1,800 58,374
Univision Communications, Inc.
Class A (a) 2,200 73,700
Viacom, Inc. Class B (a) 6,350 227,584
Walt Disney Co. 18,900 567,000
------------
3,493,850
- -----------------------------------------------------------------------------------
Metals & Mining--0.9%
Alcoa, Inc. 7,400 239,464
Allegheny Technologies, Inc. 900 62,316
Freeport-McMoRan Copper & Gold, Inc.
Class B 1,500 83,115
Newmont Mining Corp. 3,700 195,841
Nucor Corp. 2,600 141,050
Phelps Dodge Corp. 1,600 131,456
United States Steel Corp. 900 63,108
------------
916,350
- -----------------------------------------------------------------------------------
Multi-Utilities--1.4%
Ameren Corp. 1,600 80,800
CMS Energy Corp. (a) 2,200 28,468
Centerpoint Energy, Inc. 3,100 38,750
Consolidated Edison, Inc. 2,000 88,880
DTE Energy Co. 1,700 69,258
Dominion Resources, Inc. 2,900 216,891
Duke Energy Corp. 11,264 330,824
KeySpan Corp. 1,700 68,680
NiSource, Inc. 2,600 56,784
PG&E Corp. 2,900 113,912
Public Service Enterprise Group, Inc. 2,200 145,464
Sempra Energy 2,400 109,152
TECO Energy, Inc. 2,100 31,374
Xcel Energy, Inc. 3,900 74,802
------------
1,454,039
- -----------------------------------------------------------------------------------
Multiline Retail--1.1%
Big Lots, Inc. (a) 1,000 17,080
Dillard's, Inc. Class A 700 22,295
Dollar General Corp. 3,000 41,940
Family Dollar Stores, Inc. 1,200 29,316
Federated Department Stores 4,366 159,796
JC Penney Co., Inc. 1,900 128,269
Kohl's Corp. (a) 2,900 171,448
Nordstrom, Inc. 2,000 73,000
Sears Holdings Corp. (a) 881 136,414
Target Corp. 7,600 371,412
------------
1,150,970
8 S&P 500(R) GEARED(SM) FUND INC. JUNE 30, 2006
Schedule of Investments (continued)
Shares
Industry Common Stocks Held Value
===================================================================================
Office Electronics--0.1%
Xerox Corp. (a) 8,600 $ 119,626
- -----------------------------------------------------------------------------------
Oil, Gas & Consumable Fuels--7.6%
Anadarko Petroleum Corp. 4,000 190,760
Apache Corp. 2,800 191,100
Chesapeake Energy Corp. 3,000 90,750
Chevron Corp. 19,691 1,222,023
ConocoPhillips 14,508 950,709
Consol Energy, Inc. 1,600 74,752
Devon Energy Corp. 4,000 241,640
EOG Resources, Inc. 2,000 138,680
El Paso Corp. 6,200 93,000
Exxon Mobil Corp. 53,300 3,269,955
Hess Corp. 2,100 110,985
Kerr-McGee Corp. 1,852 128,436
Kinder Morgan, Inc. 800 79,912
Marathon Oil Corp. 3,136 261,229
Murphy Oil Corp. 1,300 72,618
Occidental Petroleum Corp. 3,800 389,690
Sunoco, Inc. 1,100 76,219
Valero Energy Corp. 5,400 359,208
Williams Cos., Inc. 5,100 119,136
XTO Energy, Inc. 3,033 134,271
------------
8,195,073
- -----------------------------------------------------------------------------------
Paper & Forest Products--0.3%
International Paper Co. 4,100 132,430
Louisiana-Pacific Corp. 1,100 24,090
MeadWestvaco Corp. 1,800 50,274
Weyerhaeuser Co. 2,000 124,500
------------
331,294
- -----------------------------------------------------------------------------------
Personal Products--0.2%
Alberto-Culver Co. Class B 800 38,976
Avon Products, Inc. 4,000 124,000
------------
162,976
- -----------------------------------------------------------------------------------
Pharmaceuticals--6.0%
Abbott Laboratories 13,500 588,735
Allergan, Inc. 1,200 128,712
Barr Pharmaceuticals, Inc. (a) 900 42,921
Bristol-Myers Squibb Co. 16,700 431,862
Eli Lilly & Co. 9,900 547,173
Forest Laboratories, Inc. (a) 2,900 112,201
Johnson & Johnson 26,000 1,557,920
King Pharmaceuticals, Inc. (a) 2,300 39,100
Merck & Co., Inc. 19,100 695,813
Mylan Laboratories 2,100 42,000
Pfizer, Inc. 64,300 1,509,121
Schering-Plough Corp. 13,000 247,390
Watson Pharmaceuticals, Inc. (a) 800 18,624
Wyeth 11,700 519,597
------------
6,481,169
- -----------------------------------------------------------------------------------
Real Estate Investment Trusts (REITs)--0.9%
Apartment Investment & Management Co.
Class A 700 30,415
Archstone-Smith Trust 2,000 101,740
Boston Properties, Inc. 800 72,320
Equity Office Properties Trust 3,400 124,134
Equity Residential 2,300 102,879
Host Marriott Corp. 1 22
Kimco Realty Corp. 1,700 62,033
Plum Creek Timber Co., Inc. 1,800 63,900
ProLogis 2,300 119,876
Public Storage, Inc. 800 60,720
Simon Property Group, Inc. 1,500 124,410
Vornado Realty Trust 900 87,795
------------
950,244
- -----------------------------------------------------------------------------------
Road & Rail--0.7%
Burlington Northern Santa Fe Corp. 3,100 245,675
CSX Corp. 1,900 133,836
Norfolk Southern Corp. 3,400 180,948
Ryder System, Inc. 500 29,215
Union Pacific Corp. 2,200 204,512
------------
794,186
- -----------------------------------------------------------------------------------
Semiconductors & Semiconductor Equipment--2.5%
Advanced Micro Devices, Inc. (a) 4,000 97,680
Altera Corp. (a) 3,000 52,650
Analog Devices, Inc. 3,100 99,634
Applied Materials, Inc. 13,800 224,664
Broadcom Corp. Class A (a) 3,750 112,688
Freescale Semiconductor, Inc. Class B (a) 3,646 107,192
Intel Corp. 51,800 981,610
Kla-Tencor Corp. 1,600 66,512
LSI Logic Corp. (a) 3,700 33,115
Linear Technology Corp. 2,500 83,725
Maxim Integrated Products, Inc. 2,700 86,697
Micron Technology, Inc. (a) 5,100 76,806
National Semiconductor Corp. 3,200 76,320
Novellus Systems, Inc. (a) 1,000 24,700
Nvidia Corp. (a) 3,200 68,128
PMC-Sierra, Inc. (a) 1,000 9,400
Teradyne, Inc. (a) 2,000 27,860
Texas Instruments, Inc. 14,300 433,147
Xilinx, Inc. 2,800 63,420
------------
2,725,948
- -----------------------------------------------------------------------------------
Software--2.9%
Adobe Systems, Inc. (a) 5,200 157,872
Autodesk, Inc. (a) 1,900 65,474
BMC Software, Inc. (a) 2,100 50,190
CA, Inc. 4,200 86,310
Citrix Systems, Inc. (a) 1,300 52,182
Compuware Corp. (a) 3,700 24,790
Electronic Arts, Inc. (a) 2,600 111,904
Intuit, Inc. (a) 1,500 90,585
Microsoft Corp. 77,400 1,803,420
Novell, Inc. (a) 3,000 19,890
Oracle Corp. (a) 33,700 488,313
Parametric Technology Corp. (a) 1,000 12,710
Symantec Corp. (a) 9,483 147,366
------------
3,111,006
- -----------------------------------------------------------------------------------
Specialty Retail--1.9%
AutoNation, Inc. (a) 1,705 36,555
AutoZone, Inc. (a) 400 35,280
Bed Bath & Beyond, Inc. (a) 2,400 79,608
Best Buy Co., Inc. 3,400 186,456
Circuit City Stores, Inc. 1,200 32,664
The Gap, Inc. 5,200 90,480
Home Depot, Inc. 18,200 651,378
Limited Brands 3,200 81,888
Lowe's Cos., Inc. 6,700 406,489
Office Depot, Inc. (a) 2,900 110,200
S&P 500(R) GEARED(SM) FUND INC. JUNE 30, 2006 9
Schedule of Investments (concluded)
Shares
Industry Common Stocks Held Value
===================================================================================
Specialty Retail (concluded)
OfficeMax, Inc. 500 $ 20,375
RadioShack Corp. 1,300 18,200
The Sherwin-Williams Co. 900 42,732
Staples, Inc. 6,150 149,568
TJX Cos., Inc. 3,800 86,868
Tiffany & Co. 1,100 36,322
------------
2,065,063
- -----------------------------------------------------------------------------------
Textiles, Apparel & Luxury Goods--0.3%
Coach, Inc. (a) 3,400 101,660
Jones Apparel Group, Inc. 1,200 38,148
Liz Claiborne, Inc. 1,100 40,766
Nike, Inc. Class B 1,600 129,600
VF Corp. 900 61,128
------------
371,302
- -----------------------------------------------------------------------------------
Thrifts & Mortgage Finance--1.5%
Countrywide Financial Corp. 5,300 201,824
Fannie Mae 8,300 399,230
Freddie Mac 5,900 336,359
Golden West Financial Corp. 2,100 155,820
MGIC Investment Corp. 700 45,500
Sovereign Bancorp, Inc. 3,570 72,507
Washington Mutual, Inc. 8,461 385,652
------------
1,596,892
- -----------------------------------------------------------------------------------
Tobacco--1.4%
Altria Group, Inc. 18,100 1,329,083
Reynolds American, Inc. 700 80,710
UST, Inc. 1,400 63,266
------------
1,473,059
- -----------------------------------------------------------------------------------
Trading Companies & Distributors--0.0%
WW Grainger, Inc. 700 52,661
- -----------------------------------------------------------------------------------
Wireless Telecommunication Services--0.7%
Alltel Corp. 3,200 204,256
Sprint Nextel Corp. 25,652 512,783
------------
717,039
- -----------------------------------------------------------------------------------
Total Common Stocks
(Cost--$89,753,321)--93.3% 100,485,453
===================================================================================
Face
Short-Term Securities Amount
===================================================================================
Time Deposits--5.6%
State Street Bank & Trust Co.,
4.25% due 7/03/2006 $6,009,771 6,009,771
- -----------------------------------------------------------------------------------
Total Short-Term Securities
(Cost--$6,009,771)--5.6% 6,009,771
===================================================================================
Number of
Options Purchased Contracts
===================================================================================
Call Options Purchased--13.6%
S&P 500 Index, expiring November 2006
at USD 1,214.76, BNP Paribas 131,985 11,766,940
S&P 500 Index, expiring November 2006
at USD 1,214.76, HSBC Securities 32,994 2,863,395
- -----------------------------------------------------------------------------------
Total Options Purchased
(Premiums Paid--$0)--13.6% 14,630,335
===================================================================================
Total Investments
(Cost--$95,763,092)--112.5% 121,125,559
===================================================================================
Options Written
===================================================================================
Call Options Written--(11.4%)
S&P 500 Index, expiring November 2006
at USD 1,266.99, HSBC Securities 49,491 (2,471,714)
S&P 500 Index, expiring November 2006
at USD 1,267.54, BNP Paribas 197,977 (9,850,916)
- -----------------------------------------------------------------------------------
Total Options Written
(Premiums Received--$0)--(11.4%) (12,322,630)
===================================================================================
Total Investments, Net of Options Written
(Cost--$95,763,092*)--101.1% 108,802,929
Liabilities in Excess of Other Assets--(1.1%) (1,147,844)
------------
Net Assets--100.0% $107,655,085
============
* The cost and unrealized appreciation (depreciation) of investments, net of
options written, as of June 30, 2006, as computed for federal income tax
purposes, were as follows:
Aggregate cost ........................................ $ 95,767,660
=============
Gross unrealized appreciation ......................... $ 29,635,904
Gross unrealized depreciation ......................... (16,600,635)
-------------
Net unrealized appreciation ........................... $ 13,035,269
=============
(a) Non-income producing security.
(b) Investments in companies considered to be an affiliate of the Fund, for
purposes of Section 2(a)(3) of the Investment Company Act of 1940, were as
follows:
--------------------------------------------------------------------------
Net Dividend
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch & Co., Inc. -- $4,050
--------------------------------------------------------------------------
o For Fund compliance purposes, the Fund's industry classifications refer to
any one or more of the industry sub-classifications used by one or more
widely recognized market indexes or ratings group indexes, and/or as
defined by Fund management. This definition may not apply for purposes of
this report, which may combine industry sub-classifications for reporting
ease. Industries are shown as a percent of net assets.
o Financial futures contracts purchased as of June 30, 2006 were as follows:
--------------------------------------------------------------------------
Number of Expiration Face Unrealized
Contracts Issue Date Value Appreciation
--------------------------------------------------------------------------
14 S&P 500 Index September 2006 $4,428,537 $49,363
--------------------------------------------------------------------------
See Notes to Financial Statements.
10 S&P 500(R) GEARED(SM) FUND INC. JUNE 30, 2006
Statement of Assets, Liabilities and Capital
As of June 30, 2006
=================================================================================================================================
Assets
- ---------------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value (identified cost--$95,324,598) $105,931,788
Investments in affiliated securities, at value (identified cost--$438,494) .... 563,436
Options purchased, at value (premiums paid--$0) ............................... 14,630,335
Cash collateral on futures contracts .......................................... 252,000
Receivables:
Dividends .................................................................. $ 114,445
Interest ................................................................... 709 115,154
------------
Prepaid expenses .............................................................. 67,862
------------
Total assets .................................................................. 121,560,575
------------
=================================================================================================================================
Liabilities
- ---------------------------------------------------------------------------------------------------------------------------------
Cash collateral on options (including accrued interest of $2,063) ............. 1,372,063
Options written, at value (premiums received--$0) ............................. 12,322,630
Payables:
Investment adviser ......................................................... 66,548
Variation margin ........................................................... 11,200 77,748
------------
Accrued expenses .............................................................. 133,049
------------
Total liabilities ............................................................. 13,905,490
------------
=================================================================================================================================
Net Assets
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets .................................................................... $107,655,085
============
=================================================================================================================================
Capital
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.001 per share, 100,000,000 shares authorized ........ $ 5,246
Paid-in capital in excess of par .............................................. 95,847,185
Undistributed investment income--net .......................................... $ 394,971
Accumulated realized capital losses--net ...................................... (1,681,517)
Unrealized appreciation--net .................................................. 13,089,200
------------
Total accumulated earnings--net ............................................... 11,802,654
------------
Total Capital--Equivalent to $20.52 per share based on 5,246,427 shares of
Common Stock outstanding (market price--$19.02) .............................. $107,655,085
============
See Notes to Financial Statements.
S&P 500(R) GEARED(SM) FUND INC. JUNE 30, 2006 11
Statement of Operations
For the Six
Months Ended
June 30,
2006
=================================================================================================================================
Investment Income
- ---------------------------------------------------------------------------------------------------------------------------------
Dividends (including $4,050 from affiliates) .................................. $ 940,130
Interest ...................................................................... 94,357
------------
Total income .................................................................. 1,034,487
------------
=================================================================================================================================
Expenses
- ---------------------------------------------------------------------------------------------------------------------------------
Investment advisory fees ...................................................... $ 434,473
Professional fees ............................................................. 91,013
Directors' fees and expenses .................................................. 21,062
Transfer agent fees ........................................................... 16,330
Accounting services ........................................................... 15,262
Printing and shareholder reports .............................................. 12,189
Listing fees .................................................................. 9,424
Custodian fees ................................................................ 9,204
Repurchase offer fees ......................................................... 2,633
Interest expense .............................................................. 2,063
Pricing fees .................................................................. 565
Other ......................................................................... 25,298
------------
Total expenses ................................................................ 639,516
------------
Investment income--net ........................................................ 394,971
------------
=================================================================================================================================
Realized & Unrealized Gain (Loss)--Net
- ---------------------------------------------------------------------------------------------------------------------------------
Realized gain (loss) on:
Investments--net ........................................................... 312,503
Futures contracts--net ..................................................... (86,352) 226,151
------------
Change in unrealized appreciation/depreciation on:
Investments--net ........................................................... (596,732)
Futures contracts--net ..................................................... 115,957
Options written--net ....................................................... 4,372,506 3,891,731
-------------------------------
Total realized and unrealized gain--net ....................................... 4,117,882
------------
Net Increase in Net Assets Resulting from Operations .......................... $ 4,512,853
============
See Notes to Financial Statements.
12 S&P 500(R) GEARED(SM) FUND INC. JUNE 30, 2006
Statements of Changes in Net Assets
For the Period For the Period
For the Six October 1, November 1,
Months Ended 2005 to 2004+ to
June 30, December 31, September 30,
Increase (Decrease) in Net Assets: 2006 2005 2005
====================================================================================================================================
Operations
- ------------------------------------------------------------------------------------------------------------------------------------
Investment income--net .............................................. $ 394,971 $ 230,416 $ 1,404,715
Realized gain--net .................................................. 226,151 9,200,875 245,430
Change in unrealized appreciation/depreciation--net ................. 3,891,731 (5,269,549) 14,467,018
-------------------------------------------------
Net increase in net assets resulting from operations ................ 4,512,853 4,161,742 16,117,163
-------------------------------------------------
====================================================================================================================================
Dividends & Distributions to Shareholders
- ------------------------------------------------------------------------------------------------------------------------------------
Investment income--net .............................................. -- (975,131) (660,000)
Realized gain--net .................................................. -- (11,353,973) --
-------------------------------------------------
Net decrease in net assets resulting from dividends and distributions
to shareholders .................................................... -- (12,329,104) (660,000)
-------------------------------------------------
====================================================================================================================================
Common Stock Transactions
- ------------------------------------------------------------------------------------------------------------------------------------
Net proceeds from the issuance of Common Stock ...................... -- -- 133,509,000
Offering costs resulting from the issuance of Common Stock .......... -- -- (279,600)
Redemption of Common Stock resulting from a repurchase offer ........ -- (37,476,977) --
-------------------------------------------------
Net increase (decrease) in net assets resulting from Common Stock
transactions ....................................................... -- (37,476,977) 133,229,400
-------------------------------------------------
====================================================================================================================================
Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets ............................. 4,512,853 (45,644,339) 148,686,563
Beginning of period ................................................. 103,142,232 148,786,571 100,008
-------------------------------------------------
End of period* ...................................................... $ 107,655,085 $ 103,142,232 $ 148,786,571
=================================================
* Undistributed investment income--net ............................. $ 394,971 -- $ 744,715
=================================================
+ Commencement of operations.
See Notes to Financial Statements.
S&P 500(R) GEARED(SM) FUND INC. JUNE 30, 2006 13
Financial Highlights
For the Period For the Period
For the Six October 1, November 1,
Months Ended 2005 to 2004+ to
The following per share data and ratios have been derived June 30, December 31, September 30,
from information provided in the financial statements. 2006 2005 2005
==================================================================================================================================
Per Share Operating Performance
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ............................... $ 19.66 $ 21.27 $ 19.10
------------------------------------------------
Investment income--net*** .......................................... .08 .04 .20
Realized and unrealized gain--net .................................. .78 .70 2.10
------------------------------------------------
Total from investment operations ................................... .86 .74 2.30
------------------------------------------------
Less dividends and distributions:
Investment income--net .......................................... -- (.19) (.09)
Realized gain--net .............................................. -- (2.16) --
------------------------------------------------
Total dividends and distributions .................................. -- (2.35) (.09)
------------------------------------------------
Offering costs resulting from the issuance of Common Stock ......... -- -- (.04)
------------------------------------------------
Net asset value, end of period ..................................... $ 20.52 $ 19.66 $ 21.27
================================================
Market price per share, end of period .............................. $ 19.02 $ 18.85 $ 20.38
================================================
==================================================================================================================================
Total Investment Return**
- ----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ................................. 4.37%@ 4.18%@ 11.90%@
================================================
Based on market price per share .................................... .90%@ 4.25%@ 2.39%@
================================================
==================================================================================================================================
Ratios to Average Net Assets
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses, excluding interest expense ............................... 1.20%* 1.29%* 1.07%*
================================================
Expenses ........................................................... 1.21%* 1.29%* 1.13%*
================================================
Investment income--net ............................................. .75%* .76%* 1.10%*
================================================
==================================================================================================================================
Supplemental Data
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) ........................... $ 107,655 $ 103,142 $ 148,787
================================================
Portfolio turnover ................................................. 1.76% .69% 5.14%
================================================
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
charges.
*** Based on average shares outstanding.
+ Commencement of operations.
@ Aggregate total investment return.
See Notes to Financial Statements.
14 S&P 500(R) GEARED(SM) FUND INC. JUNE 30, 2006
Notes to Financial Statements
1. Significant Accounting Policies:
S&P 500(R) GEARED(SM) Fund Inc. (the "Fund") is registered under the Investment
Company Act of 1940, as amended, as a non-diversified, closed-end management
investment company with a fixed term of existence. The Fund's financial
statements are prepared in conformity with U.S. generally accepted accounting
principles, which may require the use of management accruals and estimates.
Actual results may differ from these estimates. These unaudited financial
statements reflect all adjustments, which are, in the opinion of management,
necessary to present a fair statement of the results for the interim period. All
such adjustments are of a normal, recurring nature. The Fund determines and
makes available for publication the net asset value of its Common Stock on a
daily basis. The Fund's Common Stock shares are listed on the New York Stock
Exchange ("NYSE") under the symbol GRE. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments -- Equity securities that are held by the Fund that
are traded on stock exchanges or the Nasdaq National Market are valued at the
last sale price or official close price on the exchange, as of the close of
business on the day the securities are being valued or, lacking any sales, at
the last available bid price for long positions, and at the last available asked
price for short positions. In cases where equity securities are traded on more
than one exchange, the securities are valued on the exchange designated as the
primary market by or under the authority of the Board of Directors of the Fund.
Long positions traded in the over-the-counter ("OTC") market, Nasdaq Small Cap
or Bulletin Board are valued at the last available bid price or yield equivalent
obtained from one or more dealers or pricing services approved by the Board of
Directors of the Fund. Short positions traded in the OTC market are valued at
the last available asked price. Portfolio securities that are traded both in the
OTC market and on a stock exchange are valued according to the broadest and most
representative market.
Options written are valued at the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last bid price. Swap agreements are valued based upon quoted fair valuations
received daily by the Fund from a pricing service or counterparty. Financial
futures contracts and options thereon, which are traded on exchanges, are valued
at their last sale price as of the close of such exchanges. Obligations with
remaining maturities of 60 days or less are valued at amortized cost unless the
Investment Adviser believes that this method no longer produces fair valuations.
Valuation of other short-term investment vehicles is generally based on the net
asset value of the underlying investment vehicle or amortized cost.
Repurchase agreements are valued at cost plus accrued interest. The Fund employs
pricing services to provide certain securities prices for the Fund. Securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board of
Directors of the Fund, including valuations furnished by the pricing services
retained by the Fund, which may use a matrix system for valuations. The
procedures of a pricing service and its valuations are reviewed by the officers
of the Fund under the general supervision of the Fund's Board of Directors. Such
valuations and procedures will be reviewed periodically by the Board of
Directors of the Fund.
Generally, trading in foreign securities, as well as U.S. government securities
and money market instruments, is substantially completed each day at various
times prior to the close of business on the NYSE. The values of such securities
used in computing the net asset value of the Fund's shares are determined as of
such times. Foreign currency exchange rates also are generally determined prior
to the close of business on the NYSE. Occasionally, events affecting the values
of such securities and such exchange rates may occur between the times at which
they are determined and the close of business on the NYSE that may not be
reflected in the computation of the Fund's net asset value. If events (for
example, a company announcement, market volatility or a natural disaster) occur
during such periods that are expected to materially affect the value of such
securities, those securities may be valued at their fair value as determined in
good faith by the Fund's Board of Directors or by the Investment Adviser using a
pricing service and/or procedures approved by the Fund's Board of Directors.
(b) Derivative financial instruments -- The Fund will engage in various
portfolio investment strategies both to enhance its returns or as a proxy for a
direct investment in securities underlying the Fund's index. Losses may arise
due to changes in the value of the contract or if the counterparty does not
perform under the contract.
o Options -- The Fund will purchase and write call options. When the Fund
writes an option, an amount equal to the premium received by the Fund is
reflected as an asset and an equivalent liability. The amount of the
liability is
S&P 500(R) GEARED(SM) FUND INC. JUNE 30, 2006 15
Notes to Financial Statements (continued)
subsequently marked-to-market to reflect the current market value of the
option written. When a security is purchased or sold through an exercise
of an option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from (or
added to) the proceeds of the security sold. When an option expires (or
the Fund enters into a closing transaction), the Fund realizes a gain or
loss on the option to the extent of the premiums received or paid (or gain
or loss to the extent the cost of the closing transaction exceeds the
premium paid or received). When cash is received as collateral for
purchased options, the Fund may pay interest to the option writer.
Written and purchased options are non-income producing investments.
o Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such futures contracts. Futures contracts
are contracts for delayed delivery of securities at a specific future date
and at a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required by
the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount
of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by the
Fund as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the value
of the contract at the time it was opened and the value at the time it was
closed.
(c) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required.
(d) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Interest income is recognized on the accrual basis.
(e) Dividends and distributions -- Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
(f) Offering expenses -- Direct expenses relating to the public offering of the
Fund's Common Stock were charged to capital at the time of issuance of the
shares.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory and Management Agreement with
IQ Investment Advisors LLC ("IQ"), an indirect subsidiary of Merrill Lynch &
Co., Inc. ("ML & Co.").
IQ is responsible for the investment advisory, management and administrative
services to the Fund. In addition, IQ provides the necessary personnel,
facilities, equipment and certain other services necessary to the operations of
the Fund. For such services, the Fund will pay a monthly fee at an annual rate
equal to .82% of the average daily value of the Fund's net assets plus
borrowings for investment purposes, but exclude any net assets attributable to
leveraging transactions. IQ has entered into a Subadvisory Agreement with
Merrill Lynch Investment Managers, L.P. ("MLIM") pursuant to which MLIM provides
certain investment advisory services to IQ with respect to the Fund. For such
services, IQ will pay MLIM a monthly fee at an annual rate of .35% of the
average daily value of the Fund's net assets plus borrowings for investment
purposes, but exclude any net assets attributable to leveraging transactions.
There was no increase in the aggregate fees paid by the Fund for these services.
16 S&P 500(R) GEARED(SM) FUND INC. JUNE 30, 2006
Notes to Financial Statements (concluded)
In addition, Merrill Lynch, Pierce, Fenner & Smith Incorporated, an affiliate of
IQ, received $224 in commissions on the execution of portfolio security
transactions for the Fund for the six months ended June 30, 2006.
Certain officers and/or directors of the Fund are officers and/or directors of
MLIM, IQ and ML & Co.
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
contribute ML & Co.'s investment management business, including MLIM, to the
investment management business of BlackRock, Inc. The transaction is expected to
close in the third quarter of 2006.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 2006 were $2,446,361 and $1,780,937, respectively.
Transactions in options written for the six months ended June 30, 2006 were as
follows:
- --------------------------------------------------------------------------------
Number of Premiums
Call Options Written Contracts Received
- --------------------------------------------------------------------------------
Outstanding call options written,
beginning of period ........................... 247,468 --
--------------------------
Outstanding call options written,
end of period ................................. 247,468 --
==========================
4. Common Stock Transactions:
The Fund is authorized to issue 100,000,000 shares of stock, all of which are
initially classified as Common Stock, par value $.001. The Board of Directors is
authorized, however, to classify and reclassify any unissued shares of Common
Stock without approval of the holders of Common Stock.
Shares issued and outstanding during the six months ended June 30, 2006 remained
constant. During the period October 1, 2005 to December 31, 2005 shares issued
and outstanding decreased 1,748,809 as a result of a repurchase offer and during
the period November 1, 2004 to September 30, 2005 increased 6,990,000 from
shares sold.
The Fund will make offers to repurchase its shares at annual (approximately
12-month) intervals. The shares tendered in the repurchase offer will be subject
to a repurchase fee retained by the Fund to compensate the Fund for expenses
directly related to the repurchase offer.
S&P 500(R) GEARED(SM) FUND INC. JUNE 30, 2006 17
Renewal of Current Investment Advisory and Management Agreements
The Board of Directors of each Fund, currently consisting solely of Independent
Directors, as defined in Section 2(a)(19) of the Investment Company Act of 1940
(the "Investment Company Act") has the responsibility under the Investment
Company Act to consider annually the Investment Advisory and Management
Agreement of each Fund (each, a "Management Agreement" and together, the
"Management Agreements"). Each Fund's Board of Directors receives, reviews and
evaluates information concerning the services and personnel of IQ Investment
Advisors LLC ("IQ Advisors") and its affiliates at each quarterly meeting of the
Board of Directors. While particular emphasis is placed on information
concerning profitability, comparability of fees, total expenses and a Fund's
investment performance at meetings at which a renewal of the Management
Agreement is considered, the process of evaluating IQ Advisors and a Fund's
investment advisory arrangements is an ongoing one. In this regard, the Board's
consideration of the nature, extent and quality of the services provided by IQ
Advisors under the Management Agreement is expected to include deliberations at
future quarterly meetings.
At a Board meeting held on June 5, 2006, all of the Directors present at the
meeting renewed the Management Agreement for each Fund for an additional
one-year term. Each Management Agreement was considered separately by the
relevant Fund's Directors. In considering whether to approve the Management
Agreements, the Directors reviewed a meeting book and other materials from
counsel to the Funds and from IQ Advisors which: (i) included information
concerning the services rendered to the Funds by IQ Advisors and IQ Advisors'
affiliates; (ii) contained information concerning the revenues and expenses
incurred by IQ Advisors and its affiliates from the operation of the Funds; and
(iii) outlined the legal duties of the Board under the Investment Company Act.
The Board also received information from Lipper Inc. ("Lipper") comparing each
Fund's fee rate for advisory and administrative services to those of other
closed-end funds chosen by Lipper. In voting to approve the renewal of each
Fund's Management Agreement, the Boards considered, in particular, the following
factors:
(a) The nature, extent and quality of services provided by IQ Advisors and its
affiliates -- The Directors reviewed the services that IQ Advisors has provided
to the Funds. The Board of each Fund considered the size, education and
experience of IQ Advisors' staff, its use of technology, and the degree to which
IQ Advisors exercises supervision over the actions of each Fund's subadviser. In
connection with the investment advisory services provided, the Board of
Directors discussed in detail with officers of IQ Advisors the management of
each Fund's investments in accordance with the Fund's stated investment
objective and policies and the types of transactions entered into on behalf of
each Fund. During this discussion, the Directors asked detailed questions of,
and received answers from, the officers of IQ Advisors regarding the
implementation of each Fund's investment strategy, its efficacy and risks.
In addition to the investment advisory services provided to the Funds, the
Boards of Directors considered that IQ Advisors and its affiliates also provide
administrative services, stockholder services, oversight of Fund accounting,
marketing services, assistance in meeting legal and regulatory requirements and
other services necessary for the operation of the Funds. In particular, the
Boards of Directors reviewed the compliance and administrative services provided
to the Funds by IQ Advisors, including its oversight of each Fund's day-to-day
operations and its oversight of Fund accounting. The Boards noted that IQ
Advisors has an administrative, legal and compliance staff that helps ensure a
high level of quality in the compliance and administrative services provided to
the Funds. The Boards also considered each Fund's compliance history. Based on
the presentations at the meeting and the Directors' experience as Directors of
other investment companies advised by IQ Advisors, the Boards of Directors
concluded that the services provided to the Funds by IQ Advisors under the
Management Agreements were of a high quality and benefited the Funds.
(b) Investment performance of the Funds and IQ Advisors -- The Directors
considered the history, experience, resources and strengths of IQ Advisors and
its affiliates in developing and implementing the investment strategies used by
each Fund. The Boards of Directors also considered the innovative nature of each
Fund. The Boards noted that each Fund uses a relatively unique investment
strategy and that comparisons of a Fund's investment performance to the
performance of other investment companies were generally not meaningful. The
Boards reviewed each Fund's investment performance and compared such performance
to the performance of a relevant reference index. The Directors discussed the
degree to which each Fund was achieving its investment objective, noting that
each Fund had been in operation for a relatively short period of time. In
particular, the Boards noted that all of the Funds generally performed as
expected relative to their respective reference index and met their respective
investment objectives. As a result of their discussions and review, the
Directors concluded that each Fund's performance was satisfactory.
18 S&P 500(R) GEARED(SM) FUND INC. JUNE 30, 2006
Based on these factors, the Directors determined that IQ Advisors continued to
be an appropriate investment adviser for the Funds.
(c) Cost of the services provided and profits realized by IQ Advisors and its
affiliates from the relationship with the Funds -- The Directors reviewed and
considered a memorandum from IQ Advisors regarding the methodology used by IQ
Advisors in allocating its costs regarding the operations of the Funds and
calculating each Fund's profitability (if any) to IQ Advisors and its
affiliates. The Directors also reviewed and considered a report prepared by
independent consultants engaged by the Directors to review and evaluate IQ
Advisors' methodology in calculating profitability. After discussions with the
independent consultants, who participated in the meeting, and reviewing their
report, the Directors concluded that there was a reasonable basis for the
allocation of costs and the determination of profitability. The Directors
considered the cost of the services provided by IQ Advisors to each Fund and the
revenue derived by IQ Advisors and its affiliates. The Directors discussed with
representatives of IQ Advisors its general level of profitability (if any), and
the profits derived by its affiliates, including MLIM, from operating the Funds.
The Boards also considered the direct and indirect benefits derived by other IQ
Advisors affiliates, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"), from the establishment of Funds, including the
underwriting arrangements relating to the initial distribution of Fund shares.
The Boards considered federal court decisions discussing an investment adviser's
profitability and profitability levels considered to be reasonable in those
decisions. The Boards concluded that any profits made by IQ Advisors and its
affiliates (including MLIM and MLPF&S) are acceptable in relation to the nature,
extent and quality of services provided. The Boards also concluded that each
Fund benefited from these services.
(d) The extent to which economies of scale would be realized as a Fund grows and
whether fee levels would reflect such economies of scale -- The Boards
considered the extent to which economies of scale might be realized if the
assets of the Funds increase and whether there should be changes in the
management fee rate or structure in order to enable a Fund to participate in
these economies of scale. The Boards noted that, because each Fund is a
closed-end fund, any increase in asset levels would have to come from the
appreciation of Fund assets. The Boards also noted that each Fund, except for
Dow 30(SM) Premium & Dividend Income Fund Inc. and S&P 500(R) Covered Call Fund
Inc., is an interval fund that periodically allows stockholders to tender their
shares to the Funds and that such tender offers reduce the amount of Fund
assets. In consideration of these and other factors, the Boards determined that
no changes were currently necessary to each Fund's fee structure. The Directors
also discussed the renewal requirements for investment advisory agreements, and
determined that they would revisit this issue no later than when they next
review the investment advisory fees after the one-year renewal term of the
Management Agreements.
(e) Comparison of services rendered and fees paid to those under other
investment advisory contracts, such as contracts of the same and other
investment advisers or other clients -- The Directors compared both the services
rendered and the fees paid under the Management Agreements to the contracts of
other investment advisers with respect to other closed-end registered investment
companies. In particular, the Directors evaluated each Fund's contractual fee
rate for advisory and administrative services as compared to the contractual fee
rate of other closed-end funds chosen by Lipper. In considering this
information, the Directors took into account the relatively unique nature of the
investment strategies of the Funds and the fact that the relevant peer group of
funds provided by Lipper for comparison might have investment strategies and
restrictions different from those of the Funds. The Boards did not consider
compensation paid with respect to accounts other than registered investment
companies because IQ Advisors utilizes each Fund's strategy in connection with
only its registered funds. In particular, the Boards noted that each Fund's
contractual management fee rate at a common asset level was lower than the
median fee rate of its peer funds.
Conclusion -- No single factor was determinative to the decision of the Boards.
Based on the foregoing and such other matters as were deemed relevant, all of
the Directors who were present at the June 5, 2006 meeting concluded that the
advisory fee rate of each Fund was reasonable in relation to the services
provided by IQ Advisors to the Funds, as well as the costs incurred and benefits
gained by IQ Advisors and its affiliates in providing such services, including
the investment advisory and administrative components. The Boards also found the
investment advisory fees to be reasonable in comparison to the fees charged by
advisers to other funds of similar size. As a result, the Board of Directors of
each Fund approved the Management Agreement for each Fund. The Directors were
represented by independent legal counsel who assisted them in their
deliberations.
"Dow 30" is a service mark of Dow Jones & Company, Inc.
S&P 500(R) GEARED(SM) FUND INC. JUNE 30, 2006 19
Renewal of Current Investment Subadvisory Agreements
The Board of Directors of each Fund, currently consisting solely of Independent
Directors, at a meeting held on June 5, 2006 considered and approved the renewal
of the Current Investment Subadvisory Agreement of each Fund (each a
"Subadvisory Agreement" and together, the "Subadvisory Agreements"). Each
Subadvisory Agreement was considered separately by the relevant Fund's
Directors. At each quarterly meeting of the Board of Directors, each Fund's
Board receives, reviews and evaluates information concerning the services and
personnel of MLIM, as subadviser to each of S&P 500(R) GEARED(SM) Fund Inc. and
Small Cap Premium & Dividend Income Fund Inc., PEA Capital LLC ("PEA"), as
subadviser to each of S&P 500(R) Covered Call Fund Inc. and Enhanced S&P 500(R)
Covered Call Fund Inc., and Nuveen Asset Management ("Nuveen", and together with
MLIM and PEA, the "Subadvisers"), as subadviser to Dow 30(SM) Premium & Dividend
Income Fund Inc. While particular emphasis is placed on information concerning a
Fund's investment performance at meetings at which a renewal of the Subadvisory
Agreements is considered, the process of evaluating each Subadviser and the
Fund's subadvisory arrangements is an ongoing one.
(a) The nature, extent and quality of services provided by each Subadviser --
The Directors reviewed the services that each Subadviser provides to each of
their respective Funds. In connection with the investment subadvisory services
provided to the respective Funds, the Directors discussed in detail with
officers of IQ Advisors and members of each Subadviser's portfolio management
team, the management of each Fund's investments in accordance with the Fund's
stated investment objective and policies and the types of transactions that have
been entered into on behalf of the Funds. Drawing on their collective industry
experience, the Directors discussed each Fund's investment strategy with
representatives from each Subadviser, including discussions regarding the
premises underlying the Fund's investment strategy, its efficacy and potential
risks. The Directors also considered the favorable history, reputation and
background of each Subadviser and its personnel, and the substantial experience
of such Subadviser's portfolio management teams. With respect to Funds
subadvised by MLIM, the Directors discussed the fact that MLIM would be merging
with BlackRock to form a new advisory firm and considered the potential effects
such merger may have on such Funds before and after the merger. With respect to
Funds subadvised by PEA, the Directors discussed the fact that it was being
contemplated that PEA would be dissolved and all of its personnel and resources
would be transferred to its affiliate, Oppenheimer Capital LLC. The Directors
considered the potential effects such novation may have on the Funds subadvised
by PEA and determined that it would not result in any change in the way in which
the Funds are managed or operated and would not harm the Funds in any manner and
that there would not be an assignment of the Subadvisory Agreement within the
meaning of the Investment Company Act.
The Board of Directors of each Fund concluded that the services provided to the
Fund by each of the Subadvisers under the Subadvisory Agreement were of a high
quality and would continue to benefit the respective Funds.
(b) Investment performance of the Funds and each Subadviser -- The Board of
Directors of each Fund received and considered information about the Fund's
investment performance in comparison to the performance of its relative
reference index and also in light of its stated investment objective and made
the determinations discussed above under "Renewal of Current Investment Advisory
and Management Agreements." Based on these factors, the Directors determined
that each Subadviser continued to be appropriate for each of its respective
Funds.
(c) Cost of the services provided and profits realized by each Subadviser from
its relationship with the relevant Funds -- The Directors considered the
profitability to MLIM of serving as investment subadviser to two Funds and from
its relationship with IQ Advisors based on the information discussed above under
"Renewal of Current Investment Advisory and Management Agreements". Based on
such information, the Boards concluded that MLIM's profits are acceptable in
relation to the nature, extent and quality of services provided.
The Directors noted that profitability data was not provided with respect to the
unaffiliated Subadvisers of the Funds and concluded that such data was
unnecessary because such subadvisory arrangements were entered into at "arm's
length" between the Subadviser and IQ Advisors.
Each Fund's Board of Directors then considered the potential direct and indirect
benefits to each Subadviser and its affiliates from their relationship with the
Fund, including the reputational benefits from managing the Funds. The Board of
Directors of each Fund concluded that the potential benefits to each Subadviser
were consistent with those obtained by other subadvisers in similar types of
arrangements.
20 S&P 500(R) GEARED(SM) FUND INC. JUNE 30, 2006
(d) The extent to which economies of scale would be realized as a Fund grows and
whether fee levels would reflect such economies of scale -- The Boards
considered the extent to which economies of scale might be realized if the
assets of the Funds increase and whether there should be changes in the
subadvisory fee rate or structure in order to enable a Fund to participate in
these economies of scale. The Directors noted that each Subadviser's fees are
paid by IQ Advisors out of its fees and not by the Funds directly. The Boards
noted that, because each Fund is a closed-end fund, any increase in asset levels
would have to come from the appreciation of Fund assets. The Boards also noted
that each Fund, except for Dow 30(SM) Premium & Dividend Income Fund Inc. and
S&P 500(R) Covered Call Fund Inc., is an interval fund that periodically allows
stockholders to tender their shares to the Funds and that such tender offers
reduce the amount of Fund assets. The Directors also discussed the renewal
requirements for subadvisory agreements, and determined that they would revisit
this issue no later than when they next review the subadvisory fee after the
one-year renewal term of the Subadvisory Agreements.
(e) Comparison of services rendered and fees paid to those under other
subadvisory contracts, such as contracts of the same and other investment
advisers or other clients -- The Boards discussed the services rendered by each
Subadviser and determined that such services were consistent with those provided
by subadvisers generally and sufficient for the management of the Funds. Taking
into account the totality of the information and materials provided to the
Boards as noted above, including the fact that the subadvisory fee for each Fund
was negotiated with IQ Advisors and not payable directly by the Fund, the Boards
concluded that the subadvisory fee for each Fund was reasonable for the services
being rendered.
Conclusion -- No single factor was determinative to the decision of the Boards.
Based on the foregoing and such other matters as were deemed relevant, all of
the Directors present at the June 5, 2006 meeting concluded that the relevant
subadvisory fee rate was reasonable in relation to the services provided by each
Subadviser. As a result, all of the Directors approved the Subadvisory Agreement
for each Fund. The Directors were represented by independent legal counsel who
assisted them in their deliberations.
S&P 500(R) GEARED(SM) FUND INC. JUNE 30, 2006 21
Approval of New Subadvisory Agreements
At a meeting held on June 5, 2006, the Board of each Fund, currently consisting
only of Independent Directors, discussed and approved the New Subadvisory
Agreements between IQ Advisors and Merrill Lynch Investment Managers, LLC
("MLIM, LLC") in respect of each of S&P 500(R) GEARED(SM) Fund Inc. and Small
Cap Premium & Dividend Income Fund Inc. Each New Subadvisory Agreement was
considered separately by the relevant Fund's Directors. To assist the Boards in
their consideration of the New Subadvisory Agreements, representatives of IQ
Advisors and MLIM provided materials and information about the Transaction to
the Directors and were available at the meeting to respond to questions raised
by the Directors. The Directors were represented by their independent legal
counsel who assisted them in their deliberations.
At the June 5, 2006 Board meetings, the Directors discussed the Transaction with
representatives of IQ Advisors and MLIM. The Directors discussed, among other
things, the nature, extent and quality of the services to be provided to the
Funds by MLIM, LLC. The Directors inquired about the plans for and anticipated
roles and responsibilities of certain employees and officers of MLIM being
transferred to BlackRock in connection with the Transaction. Following their
discussions with the representatives of IQ Advisors and MLIM and after reviewing
the written materials provided, the Directors met in executive session with
their independent legal counsel to consider the New Subadvisory Agreements.
In approving the New Subadvisory Agreements, the Directors of each Fund noted in
particular that earlier in the meeting they had performed a full annual review
of the Current Subadvisory Agreements and voted to renew such agreements. During
the course of this review the Directors considered such matters as they
determined relevant in the exercise of their reasonable judgment, including that
MLIM had the capabilities, resources and personnel necessary to provide the
subadvisory services currently provided to each Fund. In addition to the
information considered and the conclusions drawn in their renewal of the Current
Subadvisory Agreements, the Directors considered, among other things, the
following factors in approving the New Subadvisory Agreements:
(i) that representatives of MLIM advised the Boards that following the
Transaction there is not expected to be any diminution in the nature, extent and
quality of services provided to the Funds and their stockholders by MLIM, LLC,
including investment management, administrative and compliance services;
(ii) the fact that the portfolio management team at MLIM that currently advises
the Funds was expected to continue to advise the Funds following the
Transaction;
(iii) the benefits of having the same portfolio management team continue to
administer each Fund's investment program;
(iv) the reputation, financial strength and resources of BlackRock and its
investment advisory subsidiaries, including MLIM, LLC;
(v) that BlackRock and its wholly owned subsidiaries and affiliates, including
MLIM, LLC, are experienced and respected asset management firms;
(vi) the fact that the schedule of each Fund's total advisory and subadvisory
fees will not increase by virtue of the New Subadvisory Agreements;
(vii) the terms and conditions of the New Subadvisory Agreements, including the
fact that the services to be provided under each Fund's New Subadvisory
Agreement are substantially the same as under its Current Subadvisory Agreement;
and
(viii) that the Funds would not bear the costs of obtaining stockholder approval
of the New Subadvisory Agreements.
Based on their consideration of these and other factors the Boards deemed
relevant to their deliberations, and the information and conclusions drawn in
their renewal of the Current Subadvisory Agreements, the Board of Directors
approved the New Subadvisory Agreement for each Fund.
22 S&P 500(R) GEARED(SM) FUND INC. JUNE 30, 2006
Fundamental Periodic Repurchase Policy
The Board of Directors approved a fundamental policy whereby the Fund would
adopt an "interval fund" structure pursuant to Rule 23c-3 under the Investment
Company Act of 1940, as amended (the "1940 Act"). As an interval fund, the Fund
will make annual repurchase offers at net asset value (less repurchase fee not
to exceed 2%) to all Fund shareholders. The percentage of outstanding shares
that the Fund can repurchase in each offer will be established by the Fund's
Board of Directors shortly before the commencement of each offer, and will be
between 5% and 25% of the Fund's then outstanding shares.
The Fund has adopted the following fundamental policy regarding periodic
repurchases:
a) The Fund will make offers to repurchase its shares at annual (approximately
12-month) intervals pursuant to Rule 23c-3 under the 1940 Act ("Offers"). The
Board of Directors may place such conditions and limitations on an Offer, as may
be permitted under Rule 23c-3.
b) The repurchase request deadline for each Offer, by which the Fund must
receive repurchase requests submitted by shareholders in response to the most
recent Offer, will be determined by reference to the exercise date of the call
spreads and written call options that comprise the Fund's transactions (as
described in the Fund's prospectus) for an annual period; and will be the
fourteenth day prior to such exercise date; provided, that in the event that
such day is not a business day, the repurchase request deadline will be the
business day subsequent to the fourteenth day prior to the exercise date of the
call spreads and written call options (the "Repurchase Request Deadline").
c) The maximum number of days between a Repurchase Request Deadline and the next
repurchase pricing date will be fourteen days; provided that if the fourteenth
day after a Repurchase Request Deadline is not a business day, the repurchase
pricing date shall be the next business day (the "Repurchase Pricing Date").
d) Offers may be suspended or postponed under certain circumstances, as provided
for in Rule 23c-3. (For further details, see Note 4 to the Financial
Statements.)
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Electronic Delivery
The Fund offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site at http://www.icsdelivery.com/live and follow the instructions. When you
visit this site, you will obtain a personal identification number (PIN). You
will need this PIN should you wish to update your e-mail address, choose to
discontinue this service and/or make any other changes to the service. This
service is not available for certain retirement accounts at this time.
Contact Information
For more information regarding the Fund, please visit www.IQIAFunds.com or
contact us at 1-877-449-4742.
S&P 500(R) GEARED(SM) FUND INC. JUNE 30, 2006 23
[LOGO] IQ
INVESTMENT
ADVISORS www.IQIAFunds.com
S&P 500(R) GEARED(SM) Fund Inc. seeks to provide total returns, exclusive of
fees and expenses of the Fund, linked to the annual performance of the S&P 500
Composite Stock Price Index.
This report, including the financial information herein, is transmitted to
shareholders of S&P 500(R) GEARED(SM) Fund Inc. for their information. It is not
a prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Statements and other
information herein are as dated and are subject to change.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available without charge at
www.IQIAFunds.com/proxyvoting.asp or upon request by calling toll-free
1-877-449-4742 or through the Securities and Exchange Commission's Web site at
http://www.sec.gov. Information about how the Fund voted proxies relating to
securities held in the Fund's portfolio during the most recent 12-month period
ended June 30 is available (1) at www.IQIAFunds.com/proxyvoting.asp; and (2) on
the Securities and Exchange Commission's Web site at http://www.sec.gov.
S&P 500(R) GEARED(SM) Fund Inc.
Box 9011
Princeton, NJ 08543-9011
#IQGRE -- 6/06
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this semi-annual
report
Item 4 - Principal Accountant Fees and Services - Not Applicable to this
semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable to this
semi-annual report
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable to this semi-annual
report
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - Not
Applicable to this semi-annual report
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others particularly
during the period in which this report is being prepared. The
registrant's certifying officers have determined that the registrant's
disclosure controls and procedures are effective based on our evaluation
of these controls and procedures as of a date within 90 days prior to
the filing date of this report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the last fiscal half-year of the
period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - Not Applicable to this semi-annual report
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
S&P 500(R) GEARED(SM) Fund Inc.
By: /s/ Mitchell M. Cox
---------------------------
Mitchell M. Cox,
Chief Executive Officer of
S&P 500(R) GEARED(SM) Fund Inc.
Date: August 23, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Mitchell M. Cox
---------------------------
Mitchell M. Cox,
Chief Executive Officer of
S&P 500(R) GEARED(SM) Fund Inc.
Date: August 23, 2006
By: /s/ Donald C. Burke
---------------------------
Donald C. Burke,
Chief Financial Officer of
S&P 500(R) GEARED(SM) Fund Inc.
Date: August 23, 2006