ETF Trends
ETF Trends

Citigroup’s (NYSE: C) 10-for-1 reverse share split has dramatically reduced overall trading volume in the U.S. stock market, but it turned out to be a nonevent for exchange traded funds tracking the financial sector and banks.

Citi’s reverse split and plans to pay a dividend are partly designed to attract more institutional investors to the shares. Yet financial-sector ETFs with large stakes in Citi are still left with the same allocation to the stock after the move.

“There are a number of clients who can’t buy stocks that are either $5 or $10 per share or below those. And there are some who can’t buy a stock without some dividend,” said Chief Executive Vikram Pandit during Citi’s first-quarter conference call in April.

“In addition to that, we do think that it could have an impact reducing volatility of the stock as the stock price is at a different level,” the CEO said. “Post the reverse split both the number of shares outstanding and the stock price are closer to our peers.”

Citigroup is a top holding in financial-sector ETFs. For example, it accounts for about 7% of SPDR KBW Bank ETF (NYSEArca: KBE) and Financial Select Sector SPDR Fund (NYSEArca: XLF).

Since the ETFs weight stocks by market capitalization, Citi’s reverse split didn’t impact the stock’s weighting in the funds, said Jim Ross, global head of SPDR ETFs at State Street Global Advisors. The ETFs now hold fewer shares of Citi, but the price of each has risen.

“It’s a pretty benign event for the ETFs,” Ross explained.

Still, financial ETFs are lagging the market badly in 2011 on uninspiring loan growth and concerns over new regulations and tougher capital requirements for banks.

Financial Select Sector SPDR Fund has seen $367 million in inflows this year, while SPDR KBW Bank ETF has seen $283 million in outflows, according to State Street.

Financial Select Sector SPDR Fund


The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.