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Spin-Off ETF: Can the Outperformance Continue?

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Spin-off activities have stepped up lately, with biggies like Honeywell International HON and Pfizer PFE being the most active ones. Lately, the industrial giant Honeywell announced plans of spinning off its homes and global distribution units and its transportation systems unit into two publicly traded companies by 2018 end (read: 5 ETFs to Buy on 13-Year High Manufacturing Activity).

On the other hand, Pfizer is exploring strategic alternatives to possibly bid good-bye to its Consumer Healthcare segment. A sale or spin-off of its consumer-health unit is expected next year. Pfizer's consumer sales have been essentially “flat for the past three years.”

This clearly explains why Pfizer intends to concentrate on the more promising, innovative pharmaceutical unit and separate it from Consumer Healthcare. The move also signifies the likely introduction of more deal-making, as per Wall Street Journal. However, the company also kept open chances of retaining the business.

Inside Spin-offs

Sometimes businesses form another autonomous entity from an existing business/division, when they believe that the separated line would add more value as an independent company. In such situations, the parent can focus on its core business management while the new entity can focus on its relative different goals.

How Profitable Spin-offs are to Investors?

According to Cantor Fitzgerald, “spinoffs completed between 2009 and 2013 outperformed the S&P 500 in their first year of trading by an average of more than 17 percent.” As per an article published on benzinga, spun-off entities have been performing better than parent companies lately.

PayPal PYPL (up about 114%) generated higher gains than parent eBay EBAY (up about 56%) in the last two years (post spin-off). WhiteWave Foods Co WWAV gained about 67.8% in the last three years against an 11.2% decline in Dean Foods Co DF. WhiteWave Foods was spun off in May 2013. Abbot Laboratories ABT cut ties with part of its business and formed a new company called AbbVie (ABBV - Free Report) in Jan 2013. ABBV was up 85% while ABT gained 41% in the last three years (as of Oct 12, 2017).

What’s Behind the Recent Surge in Spin-Off

A Chicago-based partner at The Boston Consulting Group recently commented that in a bull market, which we are witnessing currently, equities are overvalued. This makes materialization of mergers and acquisitions difficult. Instead, high valuations better justify “spinning off assets or divesting assets." If this logic holds good, we are likely to see more such actions in the coming days (read: 4 Bargain ETFs in a Pricey Market).

Notably, the United States saw 88 completed spinoffs in 1999, which fell to 80 in 2000, when the dot-com bubble burst. The number further declined to 55 in 2001. The number of actions again rose from 24 in 2007 to 30 in 2008, before sliding to 17 in 2009 when the financial crisis kicked in, as per the data provided by Dealogic, quoted on CNBC. The momentum again gained momentum in 2015 by value, though 2016 and 2017 have been subdued.

ETFs to Play

There are always ways to play such corporate actions. Below we highlight two spin-off ETFs in detail. These ETFs can get further boost from Honeywell and Pfizer’s announcements.

Guggenheim S&P Spin-Off ETF CSD

The 61-stock fund looks to track the S&P U.S. Spin-Off Index. Paypal Holdings (7.98%), Hewlett Packard Enterprise (7.85%) and Synchrony Financial (7.39%) are the top three holdings of the fund. CSD charges 65 bps in fees (read: PayPal's Strong Q2 Results Put These ETFs in Focus).

VanEck Vectors Global Spin-Off ETF SPUN

The 95-stock fund follows the Horizon Kinetics Global Spin-Off Index, which is a rules-based, equal-weighted index intended to track the performance of listed, publicly held spin-offs that are domiciled and trade in the U.S. or developed markets of Western Europe and Asia. The net expense ratio of the fund is 0.55%. United States accounts for about 78.8% of the fund. Gannett Co (1.2%), Time Inc. (1.1%) and Timkensteel (1.1%) are top three stocks of the fund.

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