The effects of ETF splits on returns, liquidity, and individual investors

Abstract

Purpose -The purpose of this paper is to extend the literature on the effects of stock splits from mutual funds splits and the QQQ split to 20 exchange traded funds (ETFs) that span a wide variety of indexes. The split sample is compared to a non-split control sample with similar characteristics between 2000 and 2006. The objectives of this study are to investigate whether the results are different between the split sample and the control sample; and whether these results are similar to other investment vehicles in the existing literature. Design/methodology/approach -The paper examines stock excess returns, total capital, several measures of liquidity, and the premium or discount relative to net present value around the split. It also tests for increases in smaller trades after the split. Findings -The results support the hypothesis that two key management objectives of splitting an ETF stock are to increase demand from retail investors and to increase the total capital under management. Support is also found for the existence of momentum in stock price indexes.Research limitations/implications -The effects of splits are examined in a larger group of ETFs that includes less-heavily traded stocks than the QQQ. These smaller ETFs potentially have more to gain in terms of increased investor interest than the QQQ. Originality/value -Positive excess returns were found in the split ETFs before and after the split. This is consistent with the tendency for stocks to be split following a large price run-up, and with momentum theory. Also, significant increases were found in total capital under management and shares outstanding after the splits for the splitting stocks. This is consistent with the hypothesis that a key goal of managers is to increase their compensation via higher total capital under management. Finally, significant increases were found in the number of small trades and dollar values of trades as a percentage of all trades (and of total dollar volumes) in the split sample. These results support the hypothesis that a primary objective (and result) of ETF stock splits is to make the shares more attractive to individual investors -despite possible deterioration of liquidity as evidenced by wider bid/ask spreads.

How Does Split Announcement Affect Stock Liquidity? Evidence from Bursa Malaysia

“…On the other hand, other researchers (Chern et al 2008;Guo et al 2008;Yu and Webb 2009) found that stock splits reduce bid-ask spreads, and increase the number of small traders who are attracted to the lower price on Ex-date, indicating liquidity improvement. Mohanty and Moon (2007) also found a significant improvement in the average trading volume, comparing 12 months post splits announcement with that for prior to announcements.…”

Short‐sale constraints and securities lending by exchange‐traded funds

“…Since most ETFs actually hold the securities (baskets) as a way of tracking their return (as opposed to engaging in options/futures markets or performing partial replications of the index), any new ETF has the potential to significantly impact the underlying securities market in the process of obtaining these securities. Academics have examined the impact of ETF introductions on underlying stock's liquidity (Hegde and McDermott, 2004; Madura and Richie, 2007; Hamm, 2011; De Winne et al , 2011), volatility and turnover (Ben‐David et al , 2012), spot‐futures trading (Deville et al , 2012), and splits (Yu and Webb, 2009). Our study contributes to this literature by studying the impact of ETF introductions on stock's short interest levels.…”

An Analysis of the Growth in the Fixed Income ETF Market

“…In general ETFs have become popular with institutional investors due to ease of use, instant diversification, low trading costs, easy access, and superior liquidity [1][2][3]. As fixed income ETFs have become more popular these traits are becoming more predominant in this market as well.…”

“…This allows us to establish the relation between equity market uncertainty and participation in fixed income ETFs. Changes in volume and VIX are preferable to levels as the levels are non-stationary 2 . In addition to changes in the level of VIX, we also examine changes in risk aversion and uncertainty which are decomposed from VIX following Bekaert et al [15] and Bekaert and Hoerova [16].…”