The board of GlobalShares FTSE Emerging Markets Fund (GSR) recently approved a 5:1 split. Trading on a split-adjusted basis will commence next Wednesday, February 17, 2010.
The action will reduce the trading price from around $100 per share to about $20 per share. According to a company press release (pdf), “The split is designed to make the Fund more accessible to investors. It is intended that this will increase liquidity.”
When ETFs have little or no volume, performing a share split in an attempt to increase liquidity is a bad idea. RevenueShares tried a 2:1 split in November 2008 and trading volume actually fell afterward. MacroShares had a ridiculous 4:1 split for its oil shares that were trading at $14 before the split, to no avail. These are acts of desperation.
Liquidity is a function of both price and volume. This is why I prefer to look at the “value traded” instead of just volume. If the price is reduced by a factor of four and the volume increases by a factor of four, then you really achieve nothing. Will the bid/ask spread and tracking error be improved by a like amount? I doubt it.
SPDR S&P 500 (NYSEARCA:SPY) has a price above $100 and is the most liquid ETF in the world. Reducing the price of an ETF from $100 to $25 does not make it any more liquid, accessible, or affordable for investors. Anyone who cannot afford a $100 share has no business buying a $25 share.
Old Mutual, the company that launched GSR with a zero-expense-ratio teaser back in December, is learning that the bar is now higher to enter the ETF arena. To compete against the entrenched participants takes more and more firepower. Schwab recognized this last year. Fidelity recognized it last week.
Old Mutual is trying many tricks – zero fees, splits – to gain a foothold in the ETF market. Unfortunately for GSR and GSD (its “developed markets” counterpart scheduled to launch today), something more is needed if these “me too” products are to attract investor assets. They are likely to be casualties before the year is over.
Disclosure covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.