SMU, an exchange-traded fund (ETF) that tracks the daily share price moves of small modular reactor (SMR) corporations NuScale Power at 2 times, will conduct a 1-for-5 reverse stock split. Because reverse splits of leveraged ETFs are typically taken as a technical measure to normalize the price when the share price has fallen excessively and the trading unit has become small, investors should be cautious about potentially heightened short-term price volatility before and after the split.
According to the financial investment industry on the 25th, the Tradr NuScale Power Daily 2x ETF (SMU) will carry out a 1-for-5 reverse stock split on Dec. 2. When the split is completed, every 5 existing shares will be consolidated into 1 share, and the per-share price will be adjusted to five times the previous level. Any fractional shares of less than one share after the split will be paid in cash to the account.
SMU gained strong popularity among Korean retail investors trading U.S. stocks. According to Korea Securities Depository (KSD), during the past month (Oct. 22 to Nov. 21), domestic investors' net purchases of SMU totaled $106.25 million (about 156.1 billion won), ranking 22nd in net purchases of foreign stocks.
However, SMU's share price remains around $4, about one-tenth of the Oct. high of $46.9. On the back of NuScale Power's (SMR) weak third-quarter results and concerns about delays in the commercialization of small nuclear plants, the share price plunged, and SMU, which tracks it at double, also posted a larger decline. As of the day, the average mark-to-market return for 4,706 investors linked to Naver Pay's "My Asset" service is -74.28%.
A reverse stock split bundles multiple shares into one, lifting the per-share price. In particular, when the share price is low, it is difficult for liquidity providers (LPs) to quote tightly, widening spreads. In this case, investors find it harder to trade at desired prices.
Experts stress that a split does not change the value of corporations or the underlying asset itself. A reverse stock split is used as a technical measure to lift a depressed share price or avoid delisting.
An official at an asset management company said, "Leveraged ETFs are structurally forced to carry out reverse splits repeatedly because in a prolonged bear market, losses accelerate due to a 'negative compounding effect' and the share price falls quickly."
In fact, SQQQ, which tracks three times the daily decline of the Nasdaq 100 Index, has repeated reverse stock splits whenever its share price fell to around $10.
An official in the securities industry said, "After a reverse split, it can create an illusion that the per-share price has surged, but there is no change in fundamental value," and added, "The higher price can instead constrain a dollar-cost averaging (averaging down) strategy."