Vanguard had a funny announcement today that I had to comment on (from Vanguard.com):
Vanguard announces share split for three exchange-traded funds
June 04, 2008 – Vanguard announced today a two-for-one split of shares of Vanguard® Total Stock Market ETF (VTI), Vanguard Emerging Markets ETF (VWO), and Vanguard Extended Market ETF (VXF). The conventional shares of the funds are not affected by this split.
The share split entitles each shareholder of record at the close of business on June 13, 2008 to receive one additional share for every share of the ETF held on that date. The additional shares are expected to be distributed to shareholders on June 17. The shares will trade at the new split-adjusted prices beginning June 18.
I need someone to explain this one to me. After all, splitting a stock does absolutely nothing for the fundamentals of the stock. You might argue there is some emotional, momentum-based advantage when go-go growth stocks do it, but this is an index fund. And a Vanguard fund to boot! I just can’t imagine the Vanguard trustees chasing momentum money, or expecting momentum money to flow to an index fund just because it’s splitting.
There is that old argument that you want to keep share prices low so “small investors” can buy a “round lot” of 100 shares… but that logic went out the door with odd lots and discount brokers about 30 years ago.
So why did they do it? Are they trying to capture small investments under $100 with the ETF? Brokers like E*Trade already offer free dividend reinvestment on ETFs, which allows you to buy partial shares.
Anyway, if you own any of these funds, note it in your calendar, Quicken, etc.
Weird.
Psychohistory 
Stock splits theoretically should be entirely cosmetic and not affect the stock price, but in practice splits do have a favorable influence on stock prices. There are a bunch of theories on why, and the theories probably apply whether the stock is an ETF or not.
I can understand it for stocks because of the emotional bias that buyers have towards signals of success, anchoring to the old price (it’s cheap now), and the momentum research.
But an index isn’t a company! You can’t possibly think that a split of index would somehow move the index! Vanguard doesn’t control the index in this case anyway.
Very strange. I think the answer has to lie in their desire to see investors purchase shares with smaller contributions…
Adam
I think you’re right on the small contribution thing. VWO, VTI, and VXF happen to be the only ETFs among the Vanguard selection that are trading above $100.
And aside from divident reinvestment, I haven’t seen a way to buy fractional shares of ETFs. With Mutual Funds you usually can through regular 401K contributions, etc. but if you’re just buying the ETFs yourself through a broker, there’s no way that I found to buy a fractional share (and I looked because this would help with dollar cost averaging …. )
There may also be an investor psychology element … Perhaps small investors somehow view > $100 ETFs as “Expensive” …
Elliot.
Hey Adam:
Yes, that’s curious, isn’t it? I actually hold the index version of those ETFs. It wouldn’t surprise me if Vanguard is doing the sesplits simply to make the funds more attractive to retail investors who buy them through brokerages that don’t allow split-share purchases. While high share prices, logically or illogically, seem to be a knee-jerk enticement to buyers of individual stocks, perhaps ETFs are more attractive at small share prices, since they allow customers to purchase the funds in amounts more exact to their target figures. (Or is everywhere offering split shares now?)
Best,
Andrew