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ETFs That Turn to Spin-offs
08/12/2015 9:00 am EST
A spin-off is a transaction that separates one segment of a publicly traded company into a separate, new, publicly traded company, explains Mark Salzinger, editor of The Investor's ETF Report.
Such companies tend to perform well after they are spun-off and two ETFs invest exclusively in them.
Typically, a parent company keeps only a limited stake (often less than 20%) in the spun-off company...if it keeps any at all. Stock in the new company is distributed proportionally to shareholders of the original company.
Why would a company carve itself up this way? One reason is to divest itself of a business that is unrelated or only tangentially relevant to its other operations.
Another reason is to segregate a company's more profitable and/or faster-growing operations from other units that are growing more slowly or require heavy capital investment.
Some companies spin-off units so that management can increase its focus on specific market segments.
Academic research into the performance of spin-offs has demonstrated
that both the original parent and the spun-off entity tend to outperform the broader market.
It makes sense that companies that are focused on fewer lines of business-and that investors can more easily evaluate-should perform relatively well.
Guggenheim Spin-Off (CSD), the largest ETF by assets to focus on spin-offs, has a strong record relative to the broad market.
CSD invests in US companies that have been spun-off from a larger parent within the last five years. Its five-year annualized return has been 20.2%.
Consumer discretionary stocks recently accounted for 21% of the portfolio, followed by financials (19%), healthcare (16%), industrials (15%), industrials (12%), staples (11%), and technology (11%).
CSD has negligible exposure to the energy sector (recently 0.5% of its portfolio), a fortuitous factor that has boosted its performance over the past year.
Van Eck recently unveiled its own spin-off ETF: Market Vectors Global Spin-Off (SPUN). It also invests in stocks that have been spun-off within the past five years.
Consumer discretionary (25% of the portfolio) and financials (19%) dominate it also, but SPUN has far less exposure to healthcare (7%), tech (6%), and staples (5%) and more to materials (9%) and energy (7%).
Either one of these spin-off ETFs would make an interesting speculation, but we prefer CSD.
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