The Motley Fool Previous Page


Don't Let These ETFs Trick You

http://www.fool.com/investing/etf/2010/04/15/dont-let-these-etfs-trick-you.aspx

Dan Caplinger
April 15, 2010

Some investors got a big surprise when they looked at their investment watch list today. But if you follow leveraged ETFs and see some big price moves, don't break out the champagne -- you haven't instantly become a millionaire.

Last week, the ETF provider ProShares announced that effective today, it would do reverse splits on shares of nine of its leveraged ETFs. Here's a partial list of some of the more popular ETFs affected:

ETF

Reverse Split Ratio

1-Year Return

UltraShort Oil & Gas (NYSE: DUG  )

1-for-5

(52.5%)

UltraShort Real Estate (NYSE: SRS  )

1-for-5

(82.7%)

Ultra Real Estate (NYSE: URE  )

1-for-5

169.1%

Ultra Financials (NYSE: UYG  )

1-for-10

115.3%

UltraShort FTSE/Xinhua China 25 (NYSE: FXP  )

1-for-5

(62.9%)

Source: ProShares, Yahoo! Finance.

If you're not familiar with reverse splits, here's how they work: The company or fund essentially looks at how many shares you have and then replaces them with a smaller number of shares. Although you have a smaller number of shares, so do all other shareholders, so your percentage stake in the company or fund remains the same. Moreover, because there are fewer shares, the value of each share goes up.

Let's take a specific example. Shares of the Ultra Financials ETF closed at around $7.75 yesterday. If you owned 1,000 shares of the fund yesterday, you'll now own just 100 -- you got one share for every 10 you owned before the split became effective. But post-split shares will be worth roughly $77.50 each, so the value of your total investment should remain about the same.

What it means
Ordinarily, investors tend to associate reverse splits with stocks that are in trouble. Often, companies will execute a reverse split when their stock prices get so low that they risk running afoul of exchange requirements. In addition, some institutional investors must follow trading guidelines that make investing in low-priced securities more difficult.

With some of these funds, though, it's hard to argue that they're in trouble. The two Ultra funds listed above have seen their shares more than double since the rally began. That's not hard to understand; both the financial industry and commercial real estate have largely dodged the bullet many saw coming during the depths of the financial crisis. Investors have responded by bidding up shares of companies like JPMorgan Chase and Simon Property Group<