Advantages of Spin-off ETFs

Spinoffs remain a popular tool for companies looking to unlock shareholder value and/or appease an activist investor.

This year is likely to be an even larger year for spinoffs than 2014. As of early January, there were already 41 spinoffs planned compared to 36 at the same time in 2014, according to Spin-Off Research. Last year, close to 60 companies engaged in spinoffs, the largest number since 2000, but not all spinoffs are worth investors’ hard-earned capital.

The Guggenheim Spin-Off ETF (NYSEArca: CSD) and the newly minted Market Vectors Global Spin-Off ETF (NYSEArca: SPUN) can help investors dodge spin-off dogs, of which there are plenty.

“The median spinoff has underperformed the S&P by 2.6 percentage points in the past six years, according to Strategas Research Partners, while the median performance for parent companies has lagged behind by 2.2 percentage points,” reports Ben Levisohn for Barron’s.

CSD, however, has fared much, much better. Last year was the second time since 2008 that CSD trailed the S&P 500 and when CSD beats the broader market, it usually does so by wide margins. For example, the ETF rose 52.1% last year while the S&P 500 gained 32.3%. In 2012, CSD surged 26.4% compared to a 16% gain for the S&P 500. [Rough Year for the Spin-Off ETF]

CSD tracks the Beacon Spin-off Index, which “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,” according to Guggenheim.