ETFs That Turn to Spin-offs

08/12/2015 9:00 am EST


Mark Salzinger

Editor and Publisher, The No-Load Fund Investor

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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