Popular leveraged and inverse exchange traded fund (ETF) provider Direxion recently announced a reverse share split in four of their funds. What does that mean?
Four of Direxion’s funds will go through a 1-for-5 reverse share split in early July, reports Chuck Jaffe for Boston Herald. Despite what this means for regular stocks, a reverse split is rather common in the ETF industry and it’s usually viewed as a good thing.
A share split adjusts a stock price. The money invested is still the same, but you hold more shares at a lower price. Reverse splits, on the other hand, occur more commonly among distressed companies that need to increase their low stock prices or meet listing requirements of an exchange. In a reverse split, one holds less shares of a stock valued at a higher price. [How to Play the S&P 500 with ETFs.]
For ETFs, share price points are basically arbitrary. Fund price movements mirror changes in its underlying holdings, so the ETFs won’t surge or plummet based on a split.
A reverse split in an ETF often is the responsible thing for the ETF provider to do. It doesn’t mean the ETF hasn’t been successful in meeting its daily mission. A fund that was priced at $40 two years ago and that is priced at $5 today was inverse a market that was working against it, and that happens sometimes.
Leveraged ETFs, like those that Direxion offers, have higher volatility and may plummet in value very suddenly. If share prices are too low, the fund’s daily tracking error may increase, which makes it hard for the ETF to reflect the value of its underlying index. Additionally, low-priced volatile funds may trade at a net asset value (NAV) that is disparate from actual share prices, and day traders would take advantage of this flaw. [Bear ETFs Winning in Uncertain Times.]
For more information on exchange traded funds, visit our ETF 101 category.
The four affected funds are:
- Direxion Daily Energy Bear 3x Shares (NYSEArca: ERY)
- Direxion Daily Real Estate Bear 3x Shares (NYSEArca: DRV)
- Direxion Daily Small Cap Bear 3x Shares (NYSEArca: TZA)
- Direxion Daily Technology Bear 3x Shares (NYSEArca: TYP)
Max Chen contributed to this article.