Invest in Stock Splits with This New ETF
Many investors’ dream is to beat the market or in simpler terms scoop up capital gains through a smart beta approach. With plain vanilla ETFs or market-cap oriented ETFs and specific sector ETFs having lost their charm, issuers are coming up with innovative and smart-beta approaches every now and then.
So far, the ETF world has already seen products on corporate actions like stock buyback and IPOs. But nothing has been rolled out on stock splits. United States Commodity Funds has filled this gap with its launch of Stock Split Index Fund on September 15, 2014. The fund trades under the ticker symbol of TOFR (read: Inside the New International Buyback Achievers ETF).
TOFR in Focus
This new passively managed ETF looks to track the 2 for 1 Index, a benchmark that utilizes an equal weighting strategy. The product will charge investors 55 basis points a year in fees and rebalance on a monthly basis. In short, the index will add one new stock and remove the oldest stock every month.
This 30-stock index follows an investment newsletter that includes those securities, the common shares of which have undergone a two (or more) to one stock split process in the 6 months before being selected for the Index. The newsletter is edited by Neil MacNeale. The index can add companies from this universe, provided the stock is traded on a U.S. exchange. These stocks may represent a wide array of capitalization.
As of September 18, 2014, Proassurance Corp, Tronox Ltd-Cl A and Allied World Assurance Co
were the top three holdings of the fund. No stock accounts for more than 3.31% of the portfolio. The fund is heavy on financials with about one-fourth of the assets invested in it. Industrials (20%), and technology (10%), round out the top three sectors. Market cap wise, both large and medium caps get an equal share of about 36.7% followed by small caps getting 20% of assets.
How Does it Fit in a Portfolio?
This ETF could be an interesting fit for investors who want a slightly more active approach, but want to stay invested in the broad markets. The product could also be an intriguing addition for those seeking an equal weight strategy indicating a hawkish stance over excessive risk taking while trying to be exposed to those stocks which have strong potential to soar in the future.
Per Investopedia, a split decision is usually agreed to when the stock price is too high. Thanks to this mechanism, investors on budget can make it to such high-flying stocks. Also, since stock split increases the number of shares in the market, trading volume and thus liquidity of that stock get elevated. This in turn tightens the bid/ask spread and lowers trading costs.
Consequently, there is always a scurry for such high-flying stocks. As result, the market capitalization of these stocks will likely increase post spilt. As per a MarketWatch article, when the stock of a company is split, it generally implies that “management is bullish”. This is because management already has faith in the potential of that stock and in its appeal among broad-based investors.
ETF Competition
The product will face no typical competition as there is no such product is available in the market. Though the fund has stocks like Apple Inc, Toronto-Dominion Bank, Union Pacific Corp. and Davita Healthcare which have exposure to several other ETFs, the newly launched product will hardly face any contest thanks to its exclusive investment objective and very low weight in each security. We believe the expense ratio of the fund is also pretty competitive posing no risk on the cost front either (read: 3 Apple ETFs for Outperformance).
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