ProShares Plans Reverse Splits on 9 ETFs
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ETFguide.com, On Friday April 9, 2010, 2:26 pm EDT
SAN DIEGO (ETFguide.com) - ProShares announced today that it will execute reverse share splits on nine ProShares ETFs.
A reverse split reduces the number of shares outstanding of a fund, and results in a proportionate increase in the NAV and price per share for that fund. Reverse splits do not change the value of a shareholder's investment. For example, for the 1-for-5 reverse splits, every five pre-split shares held by a shareholder will result in the receipt of one post-split share, which will be priced five times higher than the pre-split shares.
The reverse splits will be effective for shareholders of record after the close of the markets on April 14, 2010. Seven of the funds will execute a 1-for-5 reverse split of shares, and two will execute a 1-for-10 reverse split of shares. The funds will trade at their post-split prices on April 15. The ticker symbols for the funds will not change, and all will continue to trade on NYSE Arca.
The nine ETFs that will be executing a reverse split are listed below along with the split ratio.
--UltraShort Oil & Gas (NYSEArca: DUG - News) - Split Ratio 1:5
--UltraShort MSCI Emerging Markets (NYSEArca: EEV - News) - Split Ratio 1:5
--UltraShort FTSE/Xinhua China 25 (NYSEArca: FXP - News) - Split Ratio 1:5
--UltraShort Gold (NYSEArca: GLL - News) - Split Ratio 1:5
--UltraShort Basic Materials (NYSEArca: SMN - News) - Split Ratio 1:5
--UltraShort Real Estate (NYSEArca: SRS - News) - Split Ratio 1:5
--Ultra Real Estate (NYSEArca: URE - News) - Split Ratio 1:5
--Ultra Financials (NYSEArca: UYG - News) - Split Ratio 1:10
--UltraShort Silver (NYSEArca: ZSL - News) - Split Ratio 1:10
Illustration of a Reverse Split
Here's an example of how a 1-for-5 reverse split works:
Let's assume a shareholder owns 100 shares of a fund with a hypothetical NAV of $9 which puts the total value of the investment at $900. After a 1-for-5 share split, the shareholder now owns 20 shares with a hypothetical NAV price of $45 and the total value of the investment is the same - $900.
Fractional Shares
For shareholders who hold quantities of shares that are not an exact multiple of the reverse split ratio (for example: a multiple of 5 for a 1-to-5 split), the reverse splits will result in the creation of fractional shares. Post-split fractional shares will be redeemed for cash. This redemption may cause some shareholders to realize gains or losses, which could be a taxable event for those shareholders.
Why is ProShares doing a reverse split on these nine ETFs?
According to the company, for funds with lower nominal prices, bid/ask spreads represent a higher percentage of the transaction price than for higher-priced funds, increasing both costs and volatility even when the spread is tight.
For example, a penny spread on a $5 stock is 20 basis points (0.2%), while a penny spread on a $50 stock is two basis points (0.02%) one tenth the amount for the lower priced stock. Further, commissions charged by brokers who assess their clients on a per-share basis may be smaller, as investors will need to buy or sell fewer shares to meet their investment goals.
Also, portfolio managers are in some cases disallowed from investing in securities with a low share price, so the reverse splits will help them to comply with investment mandates.
