Stock investors are used to splits, but why all the reverse splits in ETFs?
It’s surprisingly common. ProShares did reverse splits on 26 of its ETFs in the past year. Direxion has done eight. Vanguard reverse split one of its most popular funds, the Vanguard S&P 500 ETF (VOO | A-97).
The most recent reverse split was the 1-for-2 one on the incredibly popular First Trust Short Maturity ETF (FTSM), which coincided with a surprise 10 basis point fee cut.
In normal equity land, reverse splits are often seen as a kind of last-resort window dressing for a failing company. Your stock price is headed toward a dollar, nobody wants it, so you do a 1-for-10 reverse split and—voila!—you’re respectable again and you’ve avoided delisting.
But when VOO reversed, it went from an already-fat $80 price (known as the “handle,” because it’s the part that hangs off the left side of decimal point) to $160. FTSM went from $30 to $60. I get emails every time something like this happens that ask two questions: Why; and, should investors care?
Why Do The Reverse Splits?
Most long-term investors don’t really care much about what the actual dollar price of a share of something is. If I want to put $10,000 to work in a particular ETF or stock, it’s convenient if the share price is small, because it lets me get close to that round dollar amount. If, for instance, I want to buy $10,000 of the SPDR S&P 500 ETF (SPY | A-98), which has a handle of $204, I’m going to end up with either 49 shares and $9,996 of exposure, or 50 shares and $10,200.
At the extreme edges of individual stocks, it becomes hard to actually make a rational investment for some investors: Berkshire Hathaway A shares trade at $219,300 apiece—a higher price than the value of many investors’ entire portfolios. But, for the most part, it’s a marginal difference.
But there are reasons that having a high share price can be beneficial, especially if you’re any kind of active trader or institutional investor.