The ETF industry continues to grow with total assets in US
now close to $1.5 trillion and the total number of products close
to the 1,470 mark. Apart from providing convenient, low-cost
access to popular asset classes, ETFs can also help investors
gain exposure to some niche markets or strategies that are
otherwise not accessible to retail investors.
Some of these niche strategies are capable to delivering
outsized returns to investors. Investing in spin-offs via an
ETF--Guggenheim Spin-Off ETF (
)--is one such strategy. (Read:
Winning ETF Strategies for the second half
What are Spin-offs?
Sometimes businesses create another independent firm from an
existing business/division, when they believe that spun-off
business would be more valuable as an independent entity than as
a part of an existing business.
Such a spin-off is usually successful when the unit's business
differs from the parent's business and by making it an
independent entity, the parent can focus on its core business
management while the new entity can focus on its goals.
In most cases spin-offs can unlock greater value for
shareholders. The market can value two parts after the spin-off
more than the value of the combined entity.
Do Spin-offs outperform their parents?
shows that spun-off entities generally outperform their parents
and the broader market. They typically underperform in the first
few weeks of trading--presumably due to selling by institutional
investors, but they recover nicely subsequently and outperform by
22% in the first year.
One of the reasons could be that investors prefer focused
smaller companies more than bigger diversified ones. (Read:
Forget dividends, focus on buybacks
, 2013 has seen 18 completed spin-offs so far, while more than 26
are on the dock.
What's inside the ETF?
CSD tracks the Beacon Spin-off Index that includes companies
that have been spun-off within the past 30 months but not more
recently than six months prior to the applicable rebalancing
date. Index constituents are primarily small- and mid-cap
companies with capitalizations under $10 billion.
The product currently holds 27 securities in its basket, with
an average market cap of just $5.9 million. (Read:
Buy these uncorrelated ETFs in rocky markets
The top holdings are Fortune Brands Home and Security, Exelis
Inc., WPX Energy and Fiesta Restaurant Group. In terms of sector
allocations, Energy (23.4%), Industrials (20.9%) and Consumer
Discretionary (20.4%) occupy the top three spots.
The index is comprised of up to 40 highest-ranking stocks
selected from a universe of spun-off companies, using a
quantitative rules based methodology. Each stock is given a
modified market cap weighting with a maximum weight of 5%,
resulting in a pretty diversified basket. The index is rebalanced
The product charges an expense ratio of 60 basis points
annually. However investors should note that the volume is pretty
light-just about 5,000 shares per day, which may result in wider
CSD has outperformed the broader market significantly, with a
93.1% return over the past three years and 27.1% return
year-to-date, versus 56.3% and 16.0% respectively for SPY.
Despite outperformance, the fund has not been very popular
with investors and has managed to attract only $198 million is
assets so far.
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GUGG-SPIN-OFF (CSD): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
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