Want To Grow? Keep ETF Share Price Low

July 15, 2015

It’s not unheard of to see ETF issuers forward-split shares of their ETFs in an effort to increase the number of shares outstanding and lower the price-per-share of their funds.

In fact, just last May, ProShares did that to 12 of its ETFs, cutting the price tag on those strategies by half and doubling the number of shares in the market.

 

But a look at recent asset flows would suggest that perhaps ETF issuers ought to be doing more share splits if they want their businesses to keep growing. Investors apparently like to buy ETFs with lower strike prices if they have that option.

Share Prices Can Matter

Consider that, year-to-date, the 10 ETFs with the largest net inflows by and large have lower share prices than the largest ETFs in the market today, Nick Colas, chief market strategist at Convergex, a global brokerage company based in New York, said in a commentary.

 

These funds cost on average half the share price of the 10 largest ETFs by assets—$65 a share versus $120 a share—and they have attracted some $56.7 billion, or 47 percent of all fresh cash into U.S.-listed ETFs this year, he says.

 

“Looking through the two ‘Top 10’ lists, it is easy to see why,” Colas said, noting that among the largest ETFs by total assets, two funds—the SPDR S&P 500 (SPY | A-99) and the iShares Core S&P 500 ETF (IVV | A-99)—cost more than $200 a share, and five of them cost more than $100 a share.

 

“ETF sponsors should consider stock splits, as some individual companies are now doing,” he added. “Want to grow? Keep your prices low. Many retail investors do still like the notion of buying a round lot of a 100 shares, and the ETFs, with lower prices do seem to have gathered more in new assets this year than the largest funds.”

 

 

The Highest Share Price Goes To …

The ETF with the highest share price in the ETF market today is the iShares Nasdaq Biotechnology ETF (IBB | A-39), which closed Monday with a share price of $379.15. An investor has to shell out almost $400 for a single share of IBB, which has $9.2 billion in total assets.

 

For comparison, similar exposure to this segment for a slightly lower share price could be found in the SPDR S&P Biotech (XBI | A-77), although XBI is hardly a steal at $259 a share. Perhaps the PowerShares Dynamic Biotech & Genome ETF (PBE | B-46) might be the better deal in this segment at about $60 a share.

 

That same dispersion in share prices can be seen in other segments. In U.S. midcap stocks, for instance, you could buy a share of the $15.9 billion SPDR S&P MidCap 400 ETF (MDY | A-84) for $275, or you could own the $12.4 billion Vanguard Mid-Cap ETF (VO | A-99) for $129 a share instead. Even cheaper yet is the $2 billion Schwab U.S. Mid-Cap ETF (SCHM | A-89) for $43.18 each, as of Monday’s close.

 

There are many ETFs in the $100- and $200-plus share price club, but keep in mind the share price of a fund isn’t the only cost consideration an investor has to make. Expense ratios, trading spreads—all of these other metrics also impact the total cost of ownership of a fund.

 

But looking at share prices alone, consider the other side of the spectrum.

 

How Low Can They Go?

To buy a share of a fund such as the PowerShares WilderHill Clean Energy ETF (PBW | C-14), which tracks a modified equal-weighted index of companies involved in cleaner energy sources or energy conservation, you would have to pay $5.15. For little more than you would pay for a latte, you could get a share of a fund investing in clean-energy-focused stocks.

 

That’s one of the lowest share prices in the ETF market today, especially if you disregard some ultra-cheap ETNs such as the C-Tracks Citi Volatility ETN (CVOL | F-67) that can be bought today for 49 cents.

 

However, the share price of a fund says nothing of the value of its holdings—more expensive ETFs do not equate to better value exposure.

 

“As with individual companies, simple corporate finance theory tells you that the price of a stock or ETF is irrelevant to its ultimate ‘value,’” Colas said. “However, ETF sponsors should likely do the same analysis that many large corporations regularly consider: ‘Should we split our stock?’”

 

“Conversely, those considering adding new products to compete against existing funds should think about offering a more ‘affordable’ alternative if the competition’s price is $100-plus,” he said.

 

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