Reverse Split Today for FAS, FAZ

By Patrick Watson

Effective Thursday morning two of the DirexionShares ETFs began trading with a reverse split. Daily Financial Bull 3X Shares (FAS) split at 1-for-5 while Daily Financial Bear 3X Shares (FAZ) had a 1-for-10 split. For every five shares of FAS you owned as of Wednesday’s close, you now have just one share which is worth five times as much. Likewise for FAZ, except the ratio is 1:10.

In a press release (pdf), Direxion says it expects trading costs for FAS and FAZ to decline as a result of this action. They think bid-ask spreads will narrow as a percent of the value traded, and that investors who pay commissions on a per-share basis will face smaller fees. Both are probably true.

For most investors this should be a non-event. DirexionShares has notified brokers and data providers so any disruptions are likely to be minimal. There is one potential snag: if you previously owned FAS or FAZ in a quantity that was not a multiple of five or ten, you will receive fractional shares from the split which cannot be traded. Direxion will redeem those fractional shares for cash at the July 8 closing split-adjusted price. If this results in your recognizing a gain or loss, it will be a taxable event for you. Otherwise, the split has no tax implications for FAS and FAZ investors.

Disclosure: No positions

Comments

[Gtarras:]

Based on their performance, shorting both of them at the same time is the best trade in town.

Jul 09 06:30 PM

[AndrewBaker:]

I wouldn't short FAZ today (Friday), unless you want to get rid of some funny money. If you want to make some money, go long: that will be the best trade in town today.

Jul 10 08:47 AM

[stkwtchr:]

THIS IS A CLASSIC CASE OF MARKET MANIPULATION. THIS WAS A $200 STOCK WHICH I HAVE BEEN ACCUMULATING. NOW THAT THE MARKET IS TURNING DOWN THIS STOCK, HAD THE PRICE NOT BEEN FIXED MAY HAVE RETURNED TO 200. DOES ANYBODY REALLY BELIEVE THAT IT WILL GO TO $2000?

Jul 10 09:15 AM

[TCK:]

They both will go back to near zero eventually. This is quite evident by the fact that both the long and the short had reverse splits. It is just the tendency of the model.

Agree with idea of shorting both. My strategy is to by put spreads on both symbols.

Jul 10 09:22 AM

[Time2Work:]

If these stocks weren't manipulated wouldn't it make "sense" for it to be a fair, equal reverse split for both FAS and FAZ?

The imbalance [one being split 1:5, the other 1:10] shows how the market is favoring one over the other, while traders [how could anyone be long in these, really?!] already have contracts entered into which would give Direxion enough assets to pay out.

Caveat Emptor to the third degree, baby.

Jul 10 12:14 PM

[Ron Rowland:]

Time2Work asks "If these stocks weren't manipulated wouldn't it make "sense" for it to be a fair, equal reverse split for both FAS and FAZ?"

No, I would not expect them to be equal. One is 3x short while the other is 3x long the Financial sector. Why would you expect them to be equal?

These stocks (sic) are not being manipulated - these ETFs are tracking an index with daily leverage.

You lost me on the "...which would give Direxion enough assets to pay out." comment. Pay out what?

Jul 11 10:00 AM

[Ron Rowland:]

Freya, you are correct regarding Zero. However, I think anyone saying that these will go to zero mean to imply that they will "approach" zero (or as they say in calculus - they have a limit of zero).

Using your own example, I think you would agree that $0.01 is "close to zero" (especially for something that once traded above $50) and your example of $0.00001 would definitely be rounded down to zero since pricing is typically only carried out to the penny.

Of course, if the underlying index has a move in excess of 33.3% in a single day, then one of the pair will "go to zero", instead of just approaching zero.

If the underlying index moves by 40% in a one day, then the sponsor/manager will likely go under since their loss for the day would be 120% while shareholder losses are capped at 100%.

Jul 12 09:42 AM

[kkerr:]

Shorting a bull ETF is still dangerous because in a strong enough uptrend with low volatility, leveraged bull ETFs can have significant gains. Thus, the short will be crushed.

Jul 13 04:33 PM