ETF Split

Yesterday when I logged into my Questrade account and saw one of my holdings, XIU, go down by almost 75%, I almost freak out. Later, I realized that it was due to the unit spliting by iShares Canada. What is a unit split? According to Investopedia, stock split is:

“A corporate action in which a company’s existing shares are divided into multiple shares. Although the number of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts, because no real value has been added as a result of the split.”

Using the XIU split as an example, there is a 4-to-1 split yesterday. 50 shares at the price of $80 per share prior to the split will end up with 200 shares at $20 per share. As you can see, the total amount of assets before and after the split actually remain the same at $4000. Then you might ask why the companies want to split the unit at the first place?
One of the major reasons for a company to split the stock is that the price for each share of the stock has been so high that it is very expensive to buy the stocks in round lots. For example, if a stock is priced at $80 per share, it will required $8000 to buy 100 shares. On the other hand, if it is only $20 per share, one will need only $2000 to buy 100 shares. Without stock splits, the stock becomes unattractive to small investors as it requires large sum of amount to invest in it and the risk of losing large amount of money might be too high for small investors.

Besides that, I think there is also a good side effect of unit split for all investors. It actually allows you to buy fractional shares of the original shares through the DRIP (Dividend Reinvest Investment Plan) if your broker does not permit that. Let me explain this using some numbers.

Let’s say I have 100 shares of XIU originally at the share price of $80. At the first quarter, XIU gives out $0.3/share dividend. Therefore, I am receiving $30 in total for dividend. I choose to reinvest all of them. But since my broker does not allow purchasing fractional shares using DRIP, with the current price of $80/share, there is not enough money to buy even one share. As a result, I will receive the $30 all in cash.

Now, the unit has been split at 4:1 ratio. XIU gives out $0.075/share for dividends. I am having 400 shares after the split. The total amount of dividends I will get is still $30(400*$0.0075). Again, I choose to reinvest all of them. With the current price of $20/share, I am able to get 1 share plus $10 cash. The 1 share after the split actually equals to 0.25 share prior to the split. Therefore, allowing fractional share purchase of the original shares through DRIP is a side effect of the stock split. And I think it is a good one.

If you have any questions about this, feel free to drop me a comment. If you like this post, please share it by clicking on “Share This” button below.