Sometimes reverse splits work. Sometimes the ploy does not. Broadly speaking, it is fair to say companies and ETF issuers employ reverse splits for cosmetic reasons. Better to have a stock or ETF trading well into the double digits than threatening to fall to $2, $1 or lower goes the conventional thinking.
Some stocks have been able to perform well after engineering reverse. Well, a more accurate way of putting it would be to say some stocks have performed admirably well after reverse splits. American International Group AIG is performing decently this year after a 2009 reverse split. So is Citigroup C following its 2011 reverse split.
Select ETFs can only hope the same fortune befalls them as a reverse split curse of sorts has permeated the ETF world over the past several years. Curses may be the stuff of urban lore, but the reverse split ETF curse is arguably more a reality than the Madden video game cover curse, which held that NFL players appearing on the cover of the popular game were doomed to injury or poor performances.
Curse or not, a recent reverse split for the Direxion Daily Gold Miners Bull 3X Shares NUGT just is not working. That much is highlighted by NUGT's 53.2 percent plunge in just the past five trading days. NUGT reverse split on a five-for-one basis after the close on April 1 and opened for trading at around $26 on April 2. Said another way, NUGT has lost more than 62 percent of its value in just 12 trading days.
NUGT is designed to deliver three times the daily performance of the NYSE Arca Gold Miners Index (GDM), the same index tracked by the downtrodden Market Vectors Gold Miners ETF GDX. As most investors by now know, gold mining stocks and ETFs ETFs have been under seige.
GDX, which earlier this week had $6.4 billion in assets under management but has seen that tally fall to $5.9 billion as of April 16, has lost almost 44 percent in the past year.
That slide has helped NUGT keep the ETF reverse split curse alive. Consider these examples. The Guggenheim Solar ETF TAN has slid over 48 percent since its February reverse split. The Market Vectors Solar ETF KWT is down about nine percent since its July 2012 reverse split.
While the U.S. Natural Gas Fund UNG has surged over 25 percent this year, the fund has lost more than 93 percent of its value since April 2007 despite multiple reverse splits.
This is the illustrious club NUGT now belongs to. That is another way of reiterating that traders ought to consider NUGT's bearish cousin, the Direxion Daily Gold Miners Bear 3X Shares DUST. Rather than dealing with hard-to-borrow fees that are associated with shorting many leveraged ETFs, traders can just go long DUST.
DUST is on a race to the stratosphere reminiscent of Apple AAPL at various points during 2012. Well except for the part where DUST is still going up this year. And speaking of splits, Direxion may want to consider a two-for-one forward split on DUST now that it is trading over $118. If the recent action in gold miners is any indication, DUST will be back in the triple digits in no time while another reverse split probably awaits NUGT.
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