As the world faces an increasing onslaught of new threats from biological and chemical weapons, viru...
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.
More from MoneyShow.com:
Related Articles on STOCKS
Hologic (HOLX), a leading provider of mammography equipment and diagnostic services for obstetrician...
International Game Technology PLC (IGT) designs, manufactures, and markets electronic gaming equipme...
Stefanie Kammerman, the Stock Whisperer, to tell you the Whisper of the Week: GLD and SLV in my week...