Why Split a Mutual Fund?

Categories : Financial, News
August 24, 2018

I’m sure that most of you have heard of a stock split, which is a fairly common event. When a company decides that their stock price has gotten too high and therefore unattractive to small investors to buy in lots of 100, they often split the stock to lower the price. This does not affect the market cap of the company, which is simply measured by stock price times shares outstanding. For instance, a company that has 100 shares of stock trading at $100 each has a market cap of $10,000. If they do a 2 for 1 split, they would then have 200 shares of stock worth $50 each for a market cap of $10,000.

Stock splits are largely psychological in that there is no rule that investors have to buy stocks in groups of 100, but everyone likes to. Therefore, when a company splits their shares, they will often see a bump in buying activity after the split. However, many investors, traders, and finance professionals like myself and Warren Buffet think that splitting stocks is ridiculous and it has no benefit outside of the company’s marketing and investor relationship teams.

If splits are a useless event for individual stocks, then they are an absolute waste of time for a mutual fund company. However, that is exactly what Fidelity did last weekend with some of their well-known funds. They did 10 for 1 share splits on funds such as Contrafund, Magellan Fund, and a variety of their sector specific funds. All of these funds were trading for over $100 per share, and some as high as almost $230 per share. The official word from Fidelity was that they were aligning their NAV (Net Asset Value) of the funds with those of their peers.

You may wonder why this move is even less valuable for a mutual fund than it is for a stock. Well, mutual funds don’t typically get traded in shares, but rather in dollars. You don’t buy 100 shares of Contrafund, you buy $10,000 of Contrafund, and that is represented by a certain number of whole shares and some fractional shares. So that might be 100.9564 shares of Contrafund, which is ticker symbol FCNTX. In fact, on our institutional trading platform for mutual funds at TD Ameritrade, it isn’t even an option to buy mutual funds by shares. They can be sold by shares, but the only purchasing option is in dollars. Therefore, does it really matter what the price of the shares of the fund are?