Last month Vanguard announced plans to “broaden access to three Vanguard ETFs” by declaring share splits in late April:
The split effective date, when the shares will start trading at their new prices, was April 20.
This week’s Making the Grade takes a closer look at splits and how you can adjust for them in the My Portfolio tool.
All publicly traded companies and exchange-traded funds (ETFs) have a set number of shares that are outstanding. A split is a decision by a company’s board of directors or mutual fund company to increase the number of shares that are outstanding by issuing more shares to current shareholders.
For example, in a 2-for-1 split, an additional share is given for each share held by a shareholder. So, if a company had 10 million shares outstanding before the split, it will have 20 million shares outstanding after a 2-for-1 split.
A stock or ETF’s price is also affected by a stock split. After a split, the stock price will be reduced (since the number of shares outstanding has increased). In the example of a 2-for-1 split, the share price will be halved. Thus, although the number of outstanding shares increases and the price of each share changes, the company’s market capitalization remains unchanged.
When a company’s share price increases to levels that it believes are too high, it may decide to do a stock split. The reason for this is that a stock split can make shares seem more affordable to small investors (even though the underlying value of the company has not changed). This also has the practical effect of increasing liquidity in the stock.
When a stock splits, it can also result in a share price increase—even though there may be a decrease immediately after the stock split. Small investors may perceive the stock as being more affordable and buy the stock. This effectively boosts demand for the stock and drives up prices.
Another possible reason for a price increase is that a stock split provides a signal to the market that the company’s share price has been increasing; people may assume this growth will continue in the future, thereby further boosting demand and prices.
The press release announcing the splits for the Vanguard ETFs stated that “Vanguard carefully monitors fund health to ensure that funds are performing as expected, being appropriately utilized, and aligning with investor-desired outcomes,” said Kaitlyn Caughlin, head of Vanguard Portfolio Review Department. “Vanguard is employing ETF share splits to keep share prices within efficient and accessible trading ranges, which benefits investors with ETF-centric portfolios by reducing uninvested cash in client accounts.”
On April 20, three Vanguard ETFs split. The Vanguard Russell 2000 ETF split 2-for-1. If you held the Vanguard Russell 2000 ETF at the close on April 19, you would have owned two shares for every share you held starting April 20, and the share price was reduced to one-half its value at the start of trading on April 20.
Vanguard Russell 2000 ETF shares closed on April 19 at $179.12 (pre-split). The price adjustment for splits is to divide the pre-split price by the split factor, so the split-adjusted price was $89.56 ($179.12 ÷ 2.0). Shares closed April 20 at $87.63.
When a company announces a stock split, it gives out two dates that are important to shareholders, a record date and an ex-date. You must hold the stock at the close of business on the record date to be eligible for the split, while the actual split itself and the adjustment to the number of shares in your account takes place on the ex-date.
Last year, Apple Inc. (AAPL) announced a 4-for-1 stock split. Each Apple shareholder of record at the close of business on August 24, 2020, received three additional shares for every share held on the record date (August 24), and trading began on a split-adjusted basis on August 31, 2020.
If you held shares of Apple before the market open on August 31, you now own four shares for every share you held (1 × 4.0), and the stock price was reduced to one-quarter of its value at the start of trading on August 31. Apple shares closed on August 28 at $499.24 (pre-split), which translates into a split-adjusted price of $124.81 ($499.24 ÷ 4.0). On August 31, Apple shares closed at $129.04.
If you sold Apple shares after the record date (August 24) but before the open on August 31, you sold them at the pre-split price. You were not entitled to the split shares. If you bought Apple shares after the record date but before August 31, you purchased shares at the pre-split price. Following the split, you received the additional shares resulting from the stock split.
Another version of a stock split is called a reverse split. Companies with low share prices typically use this procedure to increase their prices. A company may do this if it is afraid that its shares are going to be delisted or as a way of gaining more respectability in the market. Many stock exchanges will delist stocks if they fall below a specific price per share.
For example, in a reverse 1-for-5 split, 10 million outstanding shares at $0.50 each would now become two million shares outstanding [10 million × (1 ÷ 5)] at $2.50 per share [$0.50 ÷ (1 ÷ 5)]. In both cases, the company’s market capitalization (share price multiplied by the number of shares outstanding) is still $5 million.
In May 2011, Citigroup Inc. (C) reverse split its shares 1-for-10 to reduce its share volatility and discourage speculator trading. The reverse split increased its share price from $4.52 to $45.12 post-split. Every 10 shares held by an investor were replaced with one share. While the split reduced the number of its shares outstanding from 29 billion to 2.9 billion shares, the market cap of the company stayed the same (at approximately $131 billion).
When it comes to stock splits, this is perhaps the most straightforward question to answer, because most of the time investors should do nothing at all.
You may want to reconsider a stock you own if it undergoes a reverse split, as it often encourages more selling after the action. But with a regular split, there isn’t much more to do besides standing pat. Historically, there is a good chance that immediately following both the announcement and the ex-date, the stock will get a small boost, so if you were thinking of selling just before an announcement, you might want to hold off a little before doing so.
If you hold a stock or ETF in a portfolio within the My Portfolio tool, you need to manually adjust for splits.
For example, I own shares of the Vanguard Russell 2000 ETF, so I needed to make adjustments to both the number of shares that I own as well as the purchase price.
The image below shows my Vanguard Russell 2000 ETF holdings in My Portfolio. The cost per share value ($128.16) is pre-split, as are the number of shares (40.00), so I need to adjust these figures to reflect the impact of the splits.
To edit your holdings in a portfolio you’ve created, first go to the My Portfolio tool. At the My Portfolio landing page, select the portfolio with the stocks that need adjusting from the drop-down menu. Once that portfolio is loaded, click the Modify link to the right of the portfolio drop-down menu.
From the list of portfolio holdings on the Modify Portfolio page, click on the pencil icon to the left of the holdings you wish to modify (as shown above). For this example, I want to edit Vanguard Russell 2000 ETF, so I click on the pencil icon next to its name, which takes me to the Modify Transactions page for the ETF.
Here we see that I purchased 40 shares of the Vanguard Russell 2000 ETF on June 26, 2018, for $128.16 per share.
To adjust for the 2-for-1 split, there are two values I need to adjust: the shares and purchase price. To account for the 2-for-1 split, multiply the number of shares by the split factor, in this case, two. So the number of shares I own after the split is 80. Since splits don’t impact the total value of my holdings, an increase in the number of shares needs to be offset by a corresponding downward adjustment in the purchase price. Specifically, for the Vanguard Russell 2000 ETF split, my purchase price is divided by two: $128.16 ÷ 2.00 = $64.08.
So, while the number of shares and purchase price have changed, notice that the total value of the transaction remains $5,133.35.
To save the changes I made, I click the Done button.
A stock or ETF split is used primarily by companies that have seen their share prices increase substantially. Although the number of outstanding shares increases and the price per share decreases, the market cap (and the value of the company) does not change. As a result, splits help to make shares more affordable to smaller investors and provide greater marketability and liquidity in the market.
Splits are much more common than most investors think, although their impact is minor. The most important thing to keep in mind, though, is that they don’t change the value of your holding, although they may have some influence on the stock’s performance for a while after they happen.
