A Reverse Stock Split in ETFs, More Likely To Come (MWN, FAS, FAZ)

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Direxion issued a press release noting that it was conducting a one-for-two reverse stock split on for its triple-leverage ETF called the Direxion Daily Mid Cap Bear 3X Shares (NYSE: MWN).  We have actually been waiting for the exact same news, albeit on a larger reverse split scale, on the financial triple-leverage ETF’s and ETN’s.  We feel this needs to occur on the Direxion Daily Financial Bull 3X Shares (NYSE: FAS) and in the Direxion Daily Financial Bear 3X Shares (NYSE: FAZ).  These other two ETF’s track the Russell 1000 Financial Services Index with triple leverage, but they are much more volatile because of the derivatives and because there are too many variations in the NAV versus the actual share price at certain times of the day.  The low share prices also allow even the smallest of fast money traders to get in and out with too little skin in the game.

Right at the peak of the selling when the “FAS” shares were so low, we thought that Direxion was going to do a reverse split for “FAS” at that time.  A spokesperson even said that was under consideration, but the market rallied so much that it kept this from being a large call.  Having 300 million shares trade in a $3.00 ETF is rather misleading when you compare share volume and dollar volume.

What is interesting about this particular reverse split is that the stock price is high (north of $30.00) and the share volume is not that great.  The Direxion Daily Mid Cap Bear 3X Shares (MWN) has seen only 135,000 shares trade hands today, yet the average volume per day is less than 70,000 shares.

The FAS is under $9.00 now and the FAZ is barely back above $5.00, but the 52-week lows for these were $2,32 for the FAS and $4.18 for the FAZ. The FAS has traded roughly 168,950,000 shares as of 3:00 PM EST and it usually sees north of 250 million shares trade per day.  The FAZ has traded 165,333,669 shares as 3:00 PM EST and it usually sees north of 200 million shares trade per day.

In our opinion this was the right move by Direxion.  It was just in the wrong ETFs as the FAS and FAZ are much lower priced and hyperactive for share volume because of excessively low share prices.

We’ll be outlining this in full detail tomorrow and ahead of time to our open email distribution list.  We have many more ETF’s from other ETF and exchange-traded product families which we think need to pursue reverse splits, and even a few we think need to just go away entirely.

Hopefully, this is the first of many reverse splits from the world of ETFs to trim down at least some of the trader volatility in these trading instruments.  This appears to be the first reverse split in an ETF on the NYSE that we have seen.  Whether it is the first or not, it is not likely to be the last.

Jon C. Ogg
June 22, 2009

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