Day traders, ETF investors, hedgers, swing traders, and more have been using the Direxion financial leveraged ETF’s as their go-to trades in the financial sector.
Direxion Financial Bull 3X Shares (NYSE: FAS) is the triple-bullish leverage ETF for financials, and the Direxion Financial Bear 3X Shares (NYSE: FAZ) is the triple-bearish leveraged ETF for financials. These funds have only been trading since November 2008, but in order to curb some of the price parameters and the volatility of these ETFs, we wonder whether they WOULD THEY CONSIDER A REVERSE SPLIT?
Direxion Financial Bear 3X Shares (NYSE: FAZ) has been an incredible performer because the index fell so hard from the November launch date. On average it trades about 13 million shares per day, but lately it has been trading much more volume. Shortly before the close today, it had already seen 30 million shares trade hands.
The backside is the Direxion Financial Bull 3X Shares (NYSE: FAS). Because it is triple-leverage and because it is a “long” or “bullish” ETF, it has been crushed since its launch date. It is also one of the most active vehicles on the NYSE every day. It trades 93 million shares on average, but shortly before the close today it has traded more than 317 million shares.
The bull fund trades against the index with 80% of securities that comprise the Russell 1000 Financial Services Index. The rest are in derivative contracts which are the total return swap of the index. The inverse bearish fund essentially trades the swap (derivative) itself.
But the volatility in the sector has been wild, and what is interesting is that this being triple leverage only creates even more volatility inside these ETFs. The “FAS” ETF has fallen to as low as $2.32 because the stocks have been killed so much. Currently, it trades with a $5.00 handle.
If you were a fund or ETF owner and wanted to cut down at least some of the volatility in the sector, what would you do? Would you say you wanted to cut the size down or close it? No you would not. There is too much money at stake in running the ETF. So what is another option? Our answer… REVERSE STOCK SPLIT.
So I called Direxion to see if it is possible. A contact at Direxion did say that the ETF could actually split or reverse split. Is it definitely going to split? Well, that is an answer that I can’t really confirm. But it seems as if this is a possibility. A reverse stock split of an ETF may sound like an unusual notion. We have seen an ETF split normally to cut down its price to make it more attractive. But I cannot recall a single incident where an ETF has done a reverse split.
It would make sense to consider a reverse split here because of the intra-day volume. It is not a sure bet that a reverse split is coming. There are no sure things. But it might make sense for such a volatile ETF in such a volatile sector to consider a reverse split.
Even if this has apparently never happened, stranger things have happened…. And it begs another question. If a leveraged ETF were to consider a reverse split because the index has been slapped down so much… has the worst of the worst in the sector finally been seen?
JON C. OGG