Earlier this week, RevenueShares Investor Services declared a 2-for-1 stock split for three of its ETFs. At the close on Wednesday, November 5, RevenueShares Mid Cap Fund (RWK), and RevenueShares Small Cap Fund (RWJ) will issue one additional share for every outstanding share. On Thursday, the ETFs will commence trading at their new split-adjusted prices.

Why in the world would someone perform a 2-for-1 split on a security that is trading in the neighborhood of $35? According to the company’s press release, “The 2-for-1 stock split is expected to double the average daily trading volume of RevenueShares ETFs. This comes at a time of increasing interest by some investors looking for the benefits of a passively managed Exchange Traded Fund with the upside potential of weighting the S&P Indexes by revenue.”

I don’t want to knock the concept behind RevenueShares. In fact, I applaud them for bringing novel products to the market that are not just another “me too” ETF in an already over-crowded field. However, you really have to wonder about this one.

First of all, as any of you that have read my ETF Deathwatch reports know, I believe that investors and traders should focus on Average Daily Value Traded (ADVT) instead of volume. Isn’t that what is really important? How many dollars worth are being traded every day, not how many shares. As you can see, share volume can easily be misleading or manipulated. One million shares of an ETF traded with an $8 price is not the same as one million shares of an ETF at $180.

At least RevenueShares didn’t use the standard line of “it makes our shares more affordable” when making this announcement. If an investor cannot afford to buy a share at $36, then that investor should not be looking at securities priced at $18.

I don’t usually make predictions, but I’m going to make an exception today. I predict that this 2-for-1 split will not have the desired effect.

Let’s look at what this split means to a typical investor. As I write, RWK is trading at $33.34 with a bid/ask spread of 13 cents. The trading day is about half over, and RWK has registered three trades for a total volume of 1,850 shares. I don’t ever recall seeing a 2-for-1 spilt that noticeably improved the b/a spread. So after the split, I expect RWK to trade for $16.67 with a b/a spread that is likely to still be more than 10 cents. The split may therefore increase the b/a spread from 0.4% to 0.6%.

Many traders pay brokerage commissions based on the number of shares traded. Purchasing $50,000 of RWK today would require about 1500 shares (and it would be the biggest trade of the day). After the split, a $50,000 trade will require about 3000 shares. If you are paying a per-share commission, then your commission just doubled. And that is on top of the cost of the increased b/a spread.

RevenueShares are good products. It’s a shame they haven’t attracted more investor attention, assets, and trading volume. However, announcing a 2-for-1 split after the shares are already trading more than 30% below their IPO price is probably not the best solution.

Creative Commons License photo credit: markus941