Direxion, a prominent provider of leveraged exchange-traded funds (ETFs), has disclosed plans to execute reverse splits on four of its funds, a move that could have notable implications for investors. 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, with decreases ranging from 90% to 95%. Consequently, the per-share net asset value (NAV) and the opening market price the following day will see a proportional increase. For example, a 1-for-10 split will multiply the per-share NAV and market price by ten, and a 1-for-20 split by twenty. Importantly, the total market value of shares outstanding will remain unchanged, barring the redemption of fractional shares.
Investors holding these ETFs may find themselves 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 could have tax implications for shareholders, potentially resulting in a gain or loss. However, the reverse splits themselves will not trigger a taxable event for fund shareholders.
Additionally, Direxion has announced changes to the CUSIP numbers for these funds, effective November 4, 2024. The new identifiers are as follows: DUST (25461A478), TECS (25461A494), WEBS (25461A486), and YANG (25461A460).
These reverse splits are particularly significant for investors and traders who are active in these leveraged ETFs. The reduction in shares outstanding and the higher share prices could influence liquidity and trading dynamics. Moreover, the splits may affect option contracts and other derivatives tied to these ETFs. It's essential for investors to recognize that leveraged ETFs, such as those offered by Direxion, are designed for short-term trading and carry considerable risks. They aim to achieve daily leveraged investment goals and are not suitable for all investors, particularly those who do not actively manage their investments or understand the risks associated with leverage.
As the ETF landscape continues to evolve, actions like these reverse splits underscore the necessity for ongoing management and adjustments to ensure the efficiency and effectiveness of leveraged products. Investors in these Direxion funds are advised to closely monitor their holdings and seek guidance from financial advisors to fully grasp the implications of these changes on their investment strategies.
