Reverse Split: Kiss of Death for Some ETFs

The Market Vectors Solar Energy ETF KWT will undergo a 1-for-15 reverse split when U.S. markets open on Monday July 2. That makes KWT the second solar ETF to artificially inflate its price via reverse split this year. In February, the larger Guggenheim Solar ETF TAN underwent a 1-for-10 reverse split. Reverse splits among leveraged ETFs are not uncommon. In April, ProShares, the largest issuer of inverse and leveraged ETFs, announced reverse splits for 11 of its funds. Among that roster were well-known ETFs such as the ProShares UltraShort Brazil BZQ and the ProShares UltraShort Silver ZSL. In theory, leveraged ETFs are designed to go to zero. So as to avoid this outcome, reverse splits are commonplace with these products. Reverse splits are not as common for non-leveraged exchange-traded products. However, recent examples of reverse splits with non-leveraged ETFs and ETNs provide a valuable clue to traders: a reverse split may be an engraved invitation to short that product. In other words, KWT's price may not stay inflated for long, particularly with the woes being faced by the solar sector. The rival Guggenheim Solar ETF has proven as much. TAN's reverse split went into effect on February 15. The fund, which is home to downtrodden solar stocks such as First Solar FSLR, Trina Solar TSL and Suntech Power STP has proceeded to lose almost 43 percent of its value following the reverse split. TAN is not the only example of a regular long ETF faltering mightily post-reverse split. A week after TAN's reverse split, the U.S. Natural Gas Fund UNG underwent a 4-for-1 reverse split. UNG has slid almost 13.1 percent since the split. This slide included UNG's approximate 10.5 percent jump in the past month, as traders have embraced natural gas futures. In the two months following its reverse split though, UNG traded lower by more than 30 percent one point. The iPath S&P 500 VIX Short-Term Futures ETN VXX might be the most egregious post-reverse split offender. Since VXX is a volatility product that tracks VIX futures, an argument can be made that there is element of leverage to how this product functions. Leveraged or not, VXX has plunged more than 91 percent since a 1-for-4 reverse split went into effect on November 9, 2010. Bottom line: Traders that love to short ETFs might be excited about news of another imminent reverse split. Past performance is not a guarantee of future results, but in the case of ETFs and reverse splits, the evidence could be compelling.