Direxion to Reverse Split 3x Financial ETFs After Steep Fall in Price

Direxion will execute a reverse split of its leveraged and inverse financial ETFs on July 9th, after the two funds’ share prices fell so much that they became overly costly for investors to trade.

The Direxion Daily Financial Bull 3X Shares (NYSE: FAS) will execute a 1-for-5 reverse split, meaning shareholders will receive 1 share of the new FAS for every 5 shares they own today. For the Direxion Daily Financial Bear 3X Shares (NYSE: FAZ), the ratio will be 1-for-10.

Investors won’t lose any money on the deal of course, because each share will become more valuable. Based on yesterday’s closing prices, the reverse splits will raise the per-share cost of FAZ from $5.12/share to $51.20/share and boost the price of FAS from $8.34/share to $41.70/share.

The reason for the reverse split is simple: With the share price so low, FAZ and FAS had become uneconomic to trade.

Both funds trade at the minimum possible spread of one penny per share, which means investors lose two cents on a round-trip trade due to spreads. That may not sound like much, but with the share price of FAS at $5/share, two cents is 0.39% of the fund.

Moreover, many brokers charge investors a fixed per-share fee to buy and sell securities: sometimes one penny, but sometimes 2, 3 or even 4 cents per share traded. If you paid two cents per share on each trade, that means a roundtrip trade cost you 4 cents per share. Add in the two cents worth of spreads and you’re talking six cents a share to trade the fund. Again, that may not sound like much, but six cents per share works out to a 1.17% fee to buy and sell FAS at current prices. That’s more than the fund’s annual 0.95% expense ratio!

By executing a reverse stock split and raising the per-share price, the cost to trade will be reduced: six cents on a $51.12/share stock price is only 0.117%. To put it another way, the cost of buying and selling $50,000 of FAZ will drop from approximately $117/trade to just $11.70/trade.

The idea was proposed by Matt Hougan on the IndexUniverse.eu blog in early June.

Original post

Comments

[Rick99:]

Reverse splits are *never* good for share price. After r/s'ing a $5 stock, the $50 stock still has a perception in investors' minds that it is a $5 stock and the share price invariably drops. My strategy for coping with reverse splits is to sell before the split, and (if I feel a compulsion to own the stock), buy it back on a big dip after the split.

Jul 07 07:47 AM

[frankie cooper:]

your idea is true for a NORMAL security, but FAS and FAZ are different vehicles. this is the first time where a RS will be BENEFICIAL for people trading it.....


On Jul 07 07:47 AM Rick99 wrote:

> Reverse splits are *never* good for share price. After r/s'ing a
> $5 stock, the $50 stock still has a perception in investors' minds
> that it is a $5 stock and the share price invariably drops. My strategy
> for coping with reverse splits is to sell before the split, and (if
> I feel a compulsion to own the stock), buy it back on a big dip after
> the split.

Jul 07 09:12 AM

[Trench:]

Where is the outrage that here we have two ETFs that are opposites, yet both are near all time lows??? How can this be???

The SEC needs to shut down all these ETFs. They are a complete joke.

Jul 07 09:18 AM

[Luck-o-the-...:]

Trench
-You obviously show no understanding of the mechanics of the funds. They do what they were designed to do. If you don't understand them, then don't use them. But if you are going to make an accussation such as that, then at least back them with some facts. I have outlined MANY of arguments surrounding leveraged ETFs on thestreet.com, and several here. I suggest you add something to the conversation that can be pondered or debated.

Jul 07 10:32 AM

[TCK:]

My trade is to buy long dated put spreads on both.

Jul 07 10:46 AM

[User 393449:]

How will this affect the options trading on these stocks?

I have both covered call and naked put positions

Jul 07 11:39 AM

[squark62:]

ummm...don't hurt him too bad...but of course tim you're right on the matter. notice all the ranker now to diminish long ETF exposure to commodities, particularly oil. i think the SEC's focus there is much more productive than working to ban leveraged ETFs, especially the ones that track major indicies like the dow 30, S&P 500 & nasdaq composite. -cheers!


On Jul 07 10:32 AM Luck-o-the-Irish wrote:

> Trench
> -You obviously show no understanding of the mechanics of the funds.
> They do what they were designed to do. If you don't understand them,
> then don't use them. But if you are going to make an accussation
> such as that, then at least back them with some facts. I have outlined
> MANY of arguments surrounding leveraged ETFs on thestreet.com, and
> several here. I suggest you add something to the conversation that
> can be pondered or debated.

Jul 07 12:06 PM

[user4949:]

How will this 1-for-5 reverse split work? Lets say you have 599 shares of FAS. They cant exchange them for 119.8 shares of the reversed FAS stock.

Jul 07 03:37 PM

[Luck-o-the-...:]

fractional shares are paid in cash

Jul 08 09:30 AM

[Tony Petroski:]

I assume they are executing the reverse stock splits because if they didn't, both funds would trade down to zero within 3 months.

Jul 08 09:22 PM