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Monday, April 12, 2010

Signs of a top? -- reverse split for 9 ProShares ETFs

ProShares announced that it will execute reverse share splits on nine ProShares ETFs. Here are the details:

Ticker Fund Split Ratio Price
DUG UltraShort Oil & Gas 1:5 $11.22
EEV UltraShort MCSI Emerging Markets 1:5 $9.37
FXP UltraShort FTSE/Xinhua China 25 1:5 $7.15
GLL UltraShort Gold 1:5 $9.02
SMN UltraShort Basic Materials 1:5 $6.56
SRS UltraShort Real Estate 1:5 $5.62
URE Ultra Real Estate 1:5 $8.66
UYG Ultra Financials 1:10 $7.36
ZSL UltraShort Silver 1:10 $3.77

The splits take effect after the close on April 14. Here's the reason for doing the reverse splits according to ProShares: 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. ProShares believes the reverse splits will adjust the share prices to a more cost-efficient level for the Funds' shareholders and that 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.

For those who followed ProShares through the depths of the stock market downturn, there are some surprises on this list. Take SRS, for example. Just look at this chart:

It's just incredible that this ultra short real estate ETF has gone from a peak over $200 to less than $10. During the worst of the market crash, this was one of the go-to ETFs as real estate cratered and dragged the entire market down.

Now, investors seem positively enamored with real estate despite the constant stream of analysis suggesting losses in commercial real estate continue to increase. Though the index upon which SRS is based consists mostly of REITs, it doesn't help that the residential real estate market is still struggling.

With the 2x leverage calculated on a daily basis, SRS has crumpled as its counterpart, the  iShares Dow Jones U.S. Real Estate Index ETF (IYR) has surged.

With all the ultra short ETFs in the table above showing prices so low as to need reverse stock splits, it has the flavor of a market top. Underlying indexes have rebounded not only strongly but steadily. That steady advance has been very destructive to these ultra short ETFs, with their tracking of underling indexes on a daily basis serving to drive prices ever lower.

I can't help but worry that this is a sign that the sectors represented by these ultra short ETFs have come a little too far too fast. As earning season begins to unfold, bringing with it the usual volatility, we may look back at this announcement and say that it marked a temporary top. Bullish ETF investors in these sectors might want to take some profits now.

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