The Guggenheim Spin-Off ETF (NYSEArca: CSD) is the established name among exchange traded funds dedicated to corporate spin-offs and that ETF has a long tradition of outpacing the S&P 500.
A spin-off is the creation of an independent company through the sale or distribution of new shares of existing business or division of a parent company, according to Investopedia. Spinoffs can increase returns for shareholders due to the newly independent company’s ability to better focus on specific products or services. Both the parent and spin-off typically perform better through less bloat as a result of the transaction, with the spin-off often outperforming.
Spin-offs have been a a popular way to unlock shareholder value, potentially creating more focused and higher quality brands.
“In a study of 168 large ownership restructurings from 1988 to1998, spin-offs substantially outperformed the market. They showed a two-year annualized return of 27%, compared with 14% for the Russell 2000 and 17% for the S&P 500,” reports ETF Daily News, citing McKinsey data.
The VanEck Vectors Global Spin-Off ETF (NYSEArca: SPUN) is a competitor to CSD.
Unlike CSD, the competing SPUN targets global spin-offs through the Horizon Kinetics Global Spin-Off Index, a rules-based, equal-weighted index that tracks publicly held spin-offs domiciled and traded in the U.S. or developed markets of Western Europe and Asia.
SPUN will build a position in the early stages after a spin-off occurs, capitalizing on short-term selling pressure to buy low. Additionally, index components will be held for five-years to capture any potential long-term opportunities.
“CSD offers exposure to U.S. domiciled companies that have been spun-off from a parent company within the last four years and have a float-adjusted market capitalization of at least $1 billion,” according to Guggenheim.
Technology stocks account for almost a quarter of CSD’s lineup while the healthcare sector checks in at nearly 18%. Consumer discretionary and consumer staples combine for over 26%.
“Much of the impressive performance comes from the altered dynamics of the spun-off business and its parent. Spins do well partly because when a business and its management are freed from a large corporate entity, pent-up entrepreneurial forces are unleashed. The combination of accountability, responsibility and more direct incentives take their natural course. Managers have greater freedom to pursue new ventures, streamline production, and pare overhead. After the spin-off, stock options can also more directly compensate management of the new company,” said Joe Cornell of “Spin-Off Research” to ETF Daily News.