One exchange traded fund enjoying the bounce for stocks off the February lows is the Guggenheim Spin-Off ETF (NYSEArca: CSD). The popular fund is up more than 8% over the past month, outperforming the S&P 500 by 325 basis points over that period.
“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% in 2014 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.
Though CSD has a history of outperforming the broader market, investors should not the ETF is concentrated in that it has a small number of holdings so this is not the typical broad market fund.
“Having just 40 holdings is an advantage in this case. Since each presents an uncertain measure of risk, the diligent investor can stay ‘a step ahead’ by keeping up with companies and events which move the sector. Hence, the fewer the number of holdings, the more manageable it is,” according to a Seeking Alpha analysis of CSD.
Another catalyst for CSD is mergers and acquisitions activity, something that was on full display last year when H.J. Heinz acquired Kraft. Kraft was CSD’s largest holding at the time. In terms of sectors, healthcare usually produces the best-performing spin-offs.
“Another point of spin-off interest is Health Care and it follows along those same lines as large diversified industrials: the potential for spin-offs are in the company’s structure. Many global pharmaceuticals or simply personal care consumer products have those very broad based portfolios with company brands which take on a life of their own,” adds Seeking Alpha.
Guggenheim Spin-Off ETF
