Investing In A Stock Split ETF: 2 Is Better Than 1
How can you make money even in a market that’s gone sideways for most of the year, especially the last few months? One answer: invest in a cutting edge ETF that’s designed to stay “ahead” of the market, including one that’s been outperforming the market by a healthy margin this year. The USCF Stock Split Index Fund (NYSEARCA: TOFR ), pronounced “Two Fer”, is the very first ETF investing exclusively in stocks that split. On April 19, Barron’s and Lipper reported TOFR was up 5.62% year to date or more than five times higher than the rise of its category (1.06%) this year and 2.28 times more than the S&P 500’s 2.47% increase. And on May 6, investors who had invested in TOFR at the beginning of the year would have seen returns that were about four times better (4.03 times to be exact) than if they had invested the same money in the S&P 500; TOFR was up 4.31% vs.1.07% for the S&P 500, according to Barron’s and Lipper. It also was running almost five times better than its category, which was up just .88% this year. TOFR is currently in the #1 quintile rank YTD and in the top 2% in its category, according to Lipper . How does TOFR compare with other ETFs? While the fund has slightly lagged the Vanguard Dividend Appreciation ETF (NYSEARCA: VIG ), which was recently up 4.76% this year, it’s been beating the SPDR S&P 500 ETF Trust (NYSEARCA: SPY ) YTD by a healthy, four to one margin (4.31% vs roughly 1.00%). Since the fund’s inception in September 2014, its numbers do not look quite as impressive. TOFR had one really bad quarter (the fourth quarter of 2015), during which much of its previous performance was given back. TOFR’s 1.02% move higher trailed the S&P’s 7.04% gain by about 6 percentage points in that three month period. But since then, it’s bounced back well. In fact, if you take the cumulative return since TOFR’s inception, it’s up 10.89% vs. the S&P’s 7.66%. Like most investments, TOFR may underperform at times. However, over the long haul, the 20 year track record of the newsletter it’s based on is what makes TOFR compelling: it was recently up 719% vs. 185% for the Dow and 191% for the S&P 500 — a difference of nearly 4-1 over both the Dow and S&P 500 (3.89-1 to be exact for the Dow and 3.76-1 for the S&P 500). TOFR is part of USCF (United States Commodity Funds LLC) Investments, which manages nine EF funds with total recent assets of approximately $5 billion. (Its ETFs include the first commodity ETF based on crude oil launched in the U.S., which is the fourth commodity ETF of any kind launched in the U.S. USCF also manages the first natural gas based ETF, which is the most actively traded natural gas commodity ETF in the U.S.) TOFR’s concept is simple. It’s like someone asking: would you rather have one big scoop of ice cream or two smaller ones? Well, most people would feel that two scoops are better than one, especially if those two scoops somehow had the potential to grow even bigger and at a faster rate than the big one. It turns out that, according to TOFR principal and portfolio manager Andy Ngim, two shares are usually better than one. In fact, analysis shows that stocks usually tend to do well for 24-36 months after a company announces a split, so TOFR holds them for 30 months, which is smack dab in the middle of the 24-36 month period. An influential academic research study by David Ikenberry at Rice University, discussed in the April 22, 1996, issue of Forbes, reported that there is a measurable difference in a stock’s performance for up to three years after it splits 2 for 1 as opposed to those stocks that have not split. TOFR consists of 30 stocks that are equally weighted. “Each holding accounts for 3.33% of our portfolio,” says Ngim. The bottom line: no matter how big the stock is — Apple (NASDAQ: AAPL ) is included in TOFR and so is Nike (NYSE: NKE ), which split in December 2015 — the starting weighting is the same. “It’s a well-diversified group, covering small, mid-cap, and large-cap stocks,” adds Ngim. “There’s a value edge to the stocks comprising TOFR. A lot them pay dividends, so it builds in defensiveness.” A new stock is usually added every month to TOFR’s portfolio, which tracks newsletter publisher Neil MacNeale’s 2 For 1 Index. The popular newsletter has been published since August 1996. But what if there aren’t enough great two-for-one stock split candidates for MacNeale to consider? Since TOFR was launched, that’s only happened twice, including last month. I asked Ngim what happened during those times. “We follow Neil’s listings, so that’s what we did,” he explains. “During those two months, there were no changes to the portfolio, other than rebalancing all the holdings back to equal weight.” What about the future of stock splits? Does continued investing in them look rosey? “Like any investment, you’re going to get a surprise once in a while,” tells Ngim. “But many any of those surprises have been to the upside. And an upward trend has been continuing since 1996.” According to Ngim, the two-for-one remains the most common type of split, though some firms have been trying unconventional splits. “For example, Google recently did a nontraditional style split,” he says. “Newer companies seem to be more open in exploring nonconventional kinds of splits.” (In April 2014, when Google split its stock two for one, it also split into two companies, Google and its new parent, Alphabet. If Google had done a typical split, the would have doubled the voting power of their A shares (NASDAQ: GOOGL ) relative to their B shares, which would have diluted the founders’ voting power. The founders, such as Larry Page and Sergey Brin, and insiders, like executive chairman Eric Schmidt, who owned most of the Class B stock, didn’t want that, so they issued a new Class C (NASDAQ: GOOG ), whose shares do not have voting power.) Other firms have been waiting longer and longer to announce their splits. And some stocks never split, no matter how pricey they become. “For example, Berkshire Hathaway (NYSE: BRK.A ) hasn’t split,” says Ngim. The stock recently closed at a whopping $215,880 per share. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.