With internet IPOs all the rage as of late, the focus of many investors has been on companies such as Pandora (P), Groupon (GRPN) and Zynga (ZNGA). Yet, these new age tech firms have had mixed results since their debuts as investor appetite for web 2.0 companies has waned in recent weeks. Thanks to these mixed performances, some have begun to once again look at the spin-off market instead of the IPO space for new security exposure.
This could be because many believe that spin-offs, or firms that have recently been divested from their parents, are capable of generating alpha over the broad market. In this idea, solid organizations which were once tied to a particular firm are free to find their true price in the market, separate from their former parents. This price discovery can theoretically boost share prices as firms which were once divisions of companies are now their own separate entities, able to pursue their own goals and stay focused on their core businesses. Thanks to these factors, spin-offs have proven to demonstrate value for investors over the long term, according to numerous studies of the space (see Alternative Weighting Methodologies 101).
With studies backing up the idea and the general lack of growth opportunities in the market outside of the internet space, spin-offs have become intriguing to many investors once again. While investors can always buy individual securities that have recently been spun-off, a basket approach could also make sense in order to capture the total performance of the segment. For investors seeking to employ this method, Guggenheim’s Spin-Off ETF (CSD - ETF report) could be the way to go (see Understanding Leveraged ETFs).
Spin-Off ETF In Focus
CSD tracks the Beacon Spin-off Index which is comprised of approximately 40 securities selected from a broad universe of U.S.-traded stocks, ADRs and MLPs. The universe of companies eligible for inclusion in the Index 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. The index provider defines a spin-off company as any company resulting from either of the following events: a spin-off distribution of stock of a subsidiary company by its parent company to parent company shareholders or equity “carve-outs” or “partial initial public offerings” in which a parent company sells a percentage of the equity of a subsidiary to public shareholders (also read ETFs vs. Mutual Funds).
Currently, the fund holds 25 securities in total, allocating its top spots to Ascent Capital (ASCMA - Snapshot Report), Altisource Portfolio Solutions (ASPS - Snapshot Report), and Philip Morris International (PM - Analyst Report). For sectors, the two consumer segments dominate, making up 47% of the portfolio while IT and financials take up 16.6% and 13.4%, respectively. The fund charges 60 basis points a year in fees, putting it at the high end of U.S.-focused ETFs while its AUM is close to $30 million (also read Top Three BRIC ETFs).
The real selling point of the fund, however, has been its outperformance over broad benchmarks in the long-term. Since the start of 2011, CSD has gained 3.4% while (SPY - ETF report) has lost 0.4% in the same time period. This gives the fund an impressive alpha in 2011 which is only further confirmed by the long-term performance of CSD against the S&P 500; CSD has outgained SPY by roughly 600 basis points over the past five years. So, while CSD may be more expensive and less liquid than a whole lot of funds on the market, its solid performance, based on a proven methodology, could make for an interesting choice for investors in this uncertain market.
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Author is long PM.