Direxion, a prominent provider of leveraged exchange-traded funds (ETFs), has revealed plans to execute reverse splits for four of its funds, a move that could have notable implications for investors and the broader market. The funds affected include the Direxion Daily Gold Miners Index Bear 2X Shares (DUST), Direxion Daily Technology Bear 3X Shares (TECS), Direxion Daily Dow Jones Internet Bear 3X Shares (WEBS), and Direxion Daily FTSE China Bear 3X Shares (YANG). Scheduled to take effect after the market closes on November 1, 2024, the reverse splits will see DUST, TECS, and WEBS undergo a 1-for-10 split, while YANG will experience a more drastic 1-for-20 split.
This strategic adjustment will lead to a significant reduction in the total number of outstanding shares for each fund, ranging from 90% to 95%. Consequently, the per-share net asset value (NAV) and the following day's opening market price will see a proportional increase. For example, a 1-for-10 split will result in a tenfold increase in the per-share NAV and market price, whereas a 1-for-20 split will cause a twentyfold increase. Importantly, the total market value of shares outstanding will remain unchanged, except for the redemption of fractional shares.
Investors in these ETFs should be mindful of the potential for ending up with fractional shares post-split, which cannot be traded on the NYSE Arca. Direxion plans to redeem these fractional shares for cash at the fund's split-adjusted NAV as of the record date. This process may carry tax implications for shareholders, as the redemption of fractional shares could lead to the recognition of a gain or loss. However, the reverse splits themselves will not constitute a taxable event for fund shareholders.
Additionally, Direxion will update the CUSIP numbers for these funds, effective November 4, 2024, further marking a significant transition for these investment vehicles. The reverse splits are poised to influence liquidity and trading dynamics, given the reduced number of shares outstanding and higher share prices. They may also impact option contracts and other derivatives tied to these ETFs.
Leveraged ETFs, such as those offered by Direxion, are tailored for short-term trading and involve substantial risks. They aim to achieve daily leveraged investment goals and are not suitable for all investors. These products are primarily designed for sophisticated investors who actively oversee their portfolios and comprehend the risks associated with leverage. As the ETF landscape continues to evolve, actions like these reverse splits underscore the necessary management and adjustments to ensure the efficiency and effectiveness of leveraged products. Investors holding these Direxion funds are advised to closely monitor their investments and seek guidance from financial advisors to fully grasp the implications of these changes on their investment strategies.
