Spin-offs may be somewhat common among publicly-traded corporations, but they tend to offer uncommon returns to savvy investors. According to a 25-year study entitled “Restructuring Through Spinoffs,” published in 1993 by Penn State University, spin-offs tend to outperform peers and the S&P 500 by approximately 10% per year in the first three years after the spin-off. A second study of 168 restructurings conducted in 1999 by McKinsey confirmed these trends, showing two-year annualized returns of 27%, compared to 14% for the Russell 2000 and 17% for the S&P 500 over the same time period. The Guggenheim Spin-Off ETF (CSD) was designed to capitalize on these trends and offer investors an easy way to gain exposure [Download How To Pick The Right ETF Every Time].
The Guggenheim Spin-Off ETF seeks to replicate the performance of the Beacon Spin-Off Index, which consists of stocks that have been spun-off, carved out or partially IPOed within the past 30 months, but not more recently than six months prior to the applicable rebalancing date. While these spin-offs are primarily small- and mid-cap companies with market capitalization of less than $10 billion, the index does not place limitations on market capitalization.
The fund started in December of 2006 and has approximately $94 million in assets under management, as of February 2013.
What Makes CSD Unique
The Guggenheim Spin-Off ETF is the only ETF focused on spin-off opportunities. With less than $100 million under management, it’s unlikely that many additional ETFs will enter this space, despite the fund’s strong performance over the past few years.
How It Fits in a Portfolio
The Guggenheim Spin-Off ETF fits well into a number of different portfolios.
Conservative investors can appreciate the fund’s relatively modest risk profile; CSD’s 200-day volatility comes in around 12.5%, compared to SPY’s 12% figure. The fund has also managed to outperform SPY every year since inception, with the exception of 2008.
Meanwhile, the ETF is well diversified with a portfolio of approximately 26 securities in a number of different industries, including energy, technology, consumer cyclical and industrial sectors.
More aggressive investors and those focused on value opportunities can also appreciate that the ETF consists primarily of mid-, small- and micro-cap securities, which often have greater potential for growth opportunities than their large-cap counterparts [see Small Cap ETFdb Portfolio].
What It’ll Cost You
The Guggenheim Spin-Off ETF has an expense cap of 0.60%, which is modestly higher than the average ETF expense ratio of around 0.44% and lower than the average actively managed mutual fund that charges an average of 1.5%.
Under the Hood
The Guggenheim Spin-Off ETF holds about 26 different securities, with the largest holding accounting for roughly 5.5% of the portfolio, as of February 2013. Some of the larger holdings include popular spin-offs like Fiesta Restaurant Group Inc. (FRGI), Marathon Petroleum Corp (MPC) and TripAdvisor Inc. (TRIP), which were all strong performers in 2012 [see 101 High Yielding ETFs For Every Dividend Investor].
Most of the fund’s holdings are micro-, small- or mid-cap stocks with a skew towards smaller companies, given the nature of many spin-offs. While over a quarter of the fund’s total assets are allocated to energy shares, CSD does offer exposure to a number of different corners of the market, including technology, consumer cyclical, industrial and real estate sectors.
Yield, Volatility & Performance
For the six full years of the funds existence, CSD’s annual returns have been 7.78% (2007), -55.24% (2008), 65.22% (2009), 21.99% (2012), 3.75% (2011) and 26.35% (2012).
When it comes to risk and volatility, CSD has a beta that is slightly above the market, and its 200-day volatility metrics are comparable to SPY’s [see also 10 Questions About ETFs You've Been Too Afraid To Ask].
As we’ve mentioned earlier, there are no other ETFs specifically designed to incorporate spin-off stocks, but there are many different options for investors to consider. For instance, investors can look at the Guggenheim Spin-Off’s prospectus to find popular spin-off companies and then invest in these stocks individually or gain exposure to a broad basket of companies with options-based strategies.
Disclosure: No positions at time of writing.
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