Two funds in Direxion’s range of ETFs will have reverse splits after the close of business on March 25, multiplying each funds’ share price tenfold.
The one-for-ten split will impact the Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares (DRIP) and the Direxion Daily Semiconductor Bear 3X Shares (SOXS).
ETF reverse share splits have become fairly common occurrences in recent years. Historically, many funds have been leveraged and inverse ETFs and ETNs. There’s a good reason for that, and it stems from why ETFs reverse-split in the first place, according to Lara Crigger, managing editor, ETF Trends and ETF Database.
According to Crigger, when an ETF splits its shares, the number of outstanding shares increases while the price decreases by some set factor.
In a reverse share split, however, the opposite occurs: The number of outstanding shares falls while the price rises, again by some set factor. In a 1-for-10 split, the number of outstanding ETF shares would be divided by 10, while its share price would multiply by 10.
The Split Impact
In both cases, the total fair value of the ETF remains the same, and nothing changes about the securities inside the portfolio or their weightings. Reverse or not, a share split only impacts how many ETF shares are on the market and at what price you can buy them, according to Crigger.
The one complication in reverse splits happens when the number of shares you hold doesn’t divide equally by the reverse split factor. In that case, the value of whichever shares can’t be evenly divided is paid out in cash at the pre-split price.
Investors should remember that this cash payout can result in capital gains or losses, meaning the IRS can tax it. However, according to Crigger, the shares that evenly split aren’t taxed.
Additionally, two other Direxion funds are expecting changes on February 28. The index name for the Direxion Russell 1000 Value Over Growth ETF (RWVG) will change to Russell 1000 Value/Growth 150/50 Index, and the index name of the Direxion Russell 1000® Growth Over Value ETF (RWGV) will change to Russell 1000® Growth/Value 150/50 Index.
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