Direxion, a provider of inverse and leveraged ETFs, will execute a 1-for-5 reverse split on four of its funds Wednesday, July 7.
- Direxion Daily Energy Bear 3x Shares (ERY)
- Direxion Daily Real Estate Bear 3x Shares (DRV)
- Direxion Daily Small Cap Bear 3x Shares (TZA)
- Direxion Daily Technology Bear 3x Shares (TYP)
This will reduce the number of shares outstanding in each fund by about 80%. The net asset value, or NAV, of each ETF share will increase 5-fold when markets open July 8.
This means if a shareholder owns five shares at the close of trading tomorrow, he will wake up with one share on Thursday. However, just like any split, the total market value of the shares will remain the same. For example, if before the split you own 100 shares at $5 for a total investment of $500, after the split you will have 20 shares priced at $25 apiece, for a total investment of $500. This may result in shareholders holding fractions of a share. Unlike mutual funds, ETFs can’t hold fractional shares, so investors will receive cash for any fractional share amount. This cash redemption may result in a gain or loss.
Direxion says, “Leveraged ETFs are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk, consequences of seeking daily leveraged investment results and intend to actively monitor and manage their investments. Leverage ETFs are not designed to track the underlying index over a longer period of time.”