Reverse Splits in High-Yield ETFs: A Symptom, Not a Solution

In the world of high-yield ETFs, reverse splits have become a contentious tool, often marketed as a routine maintenance tactic to preserve operational efficiency. However, beneath the surface, these maneuvers frequently mask deeper structural issues, particularly net asset value (NAV) erosion. While proponents argue that reverse splits improve liquidity and options trading flexibility, the reality is that they often serve as a band-aid for funds struggling to maintain long-term sustainability. This article examines the mechanics of reverse splits in high-yield ETFs, their psychological impact on investors, and the critical risks they pose to total returns.

The Illusion of Stability: Reverse Splits and NAV Erosion

Reverse splits in high-yield ETFs are typically justified as a means to maintain a "cleaner" share price, often for the sake of options trading or margin requirements. For instance, YieldMax's 1-for-10 reverse split on its Ultra Option Income Strategy ETF (ULTY) in 2025 was framed as a strategic move to address a declining share price. However, this action did not alter the fund's underlying value. ULTY's NAV had already eroded by 60% over the preceding 12 months, with a total return of -7.5%. Such cases highlight a critical flaw: reverse splits do not address the root cause of NAV decline but instead obscure it by artificially inflating the per-share price.

The mechanics of high-yield ETFs-particularly those relying on structured strategies like covered call writing or leveraged exposure-naturally lead to NAV erosion. Distributions, often annualized and presented as high yield percentages, can exceed the actual income generated by the fund's holdings, creating a false sense of security. For example, funds with yields above 50% have seen median NAV declines of -62% over two years, compared to single-digit drawdowns in lower-yield peers. This trade-off between yield and NAV sustainability is rarely communicated to investors, who are instead enticed by the allure of high returns.

Investor Psychology: The Behavioral Pitfalls of Reverse Splits

From a behavioral finance perspective, reverse splits trigger cognitive biases that distort investor decision-making. The negative connotations associated with reverse splits-often linked to penny stocks or distressed companies-can lead to anchoring, where investors fixate on pre-split prices as a benchmark. This bias is compounded by herd behavior, as market participants may interpret a reverse split as a signal to exit, exacerbating downward pressure on the fund's share price.

While some studies suggest that reverse splits can improve liquidity by narrowing bid-ask spreads, these benefits are often short-lived. For high-yield ETFs, the primary motivation for a reverse split is not liquidity but rather the preservation of an aesthetically pleasing share price. This creates a dissonance between the fund's marketing and its actual performance, leading to misaligned expectations. Investors may perceive a reverse split as a positive step, unaware that it merely delays the inevitable: a fund's NAV decline due to structural inefficiencies.

Long-Term Risks: Reverse Splits vs. Sustainable NAV Strategies

Comparing high-yield ETFs with reverse splits to sustainable NAV strategies reveals stark differences in risk profiles. Sustainable ETFs, particularly those aligned with ESG (Environmental, Social, and Governance) criteria, have consistently outperformed their high-yield counterparts over the past five years. For example, in the first half of 2025, sustainable funds posted a median return of 12.5%, compared to 9.2% for traditional funds. This outperformance is attributed to their exposure to global markets and lower volatility, as well as their alignment with quality factors like low debt-to-equity ratios. This insight is supported by research on sustainable investing.

In contrast, high-yield ETFs with reverse splits face inherent sustainability risks. A 2025 analysis found that funds with yields above 50% experienced median NAV declines of -62% over two years, while those with 9–10% yields maintained more stable performance. This divergence underscores the importance of evaluating total returns rather than focusing solely on yield percentages. Sustainable ETFs, by design, avoid the compounding drag of excessive distributions and instead prioritize long-term capital appreciation. This strategy has been validated by performance data.

A Value-Conscious Approach to High-Yield ETFs

For investors seeking income, the key is to distinguish between sustainable and unsustainable strategies. High-yield ETFs with reverse splits should be scrutinized for their NAV trends, total returns, and the transparency of their distribution mechanisms. A fund's ability to maintain or grow its NAV over time is a stronger indicator of sustainability than its yield alone.

Investors should also compare high-yield ETFs with sustainable alternatives. For instance, the 12 US options ETFs identified for having "zero NAV erosion" demonstrate that income generation and NAV preservation are not mutually exclusive. These funds employ strategies that balance yield with capital appreciation, avoiding the structural pitfalls of reverse splits.

Conclusion

Reverse splits in high-yield ETFs are not a solution but a symptom of deeper issues. While they may temporarily mask NAV erosion, they fail to address the structural inefficiencies that lead to long-term underperformance. Investors must move beyond the allure of high yields and adopt a value-conscious approach that prioritizes total returns, NAV sustainability, and behavioral awareness. In an era where ESG strategies are outperforming traditional funds, the lesson is clear: sustainable income generation requires more than cosmetic adjustments-it demands structural integrity.