Special events are some of the best sources for high returns. This year and throughout its history, the Claymore/Beacon Spin-Off ETF (CSD) is proving that it can deliver stellar investment returns by following an events-driven strategy. ETFBase first profiled CSD in 2009.
The fund tracks a proprietary index from Beacon indexes. The index ranks spin-offs on quantitative factors, selects the top 40 spin-offs, then market cap weights them with the only condition that one holding cannot make up more than 5% of the fund. The index rebalances semi-annually, unless there are not enough new spin-offs to repopulate and adjust the index.
So far, the fund has managed impressive results from its simple criteria. Have a look at the latest one year of performance against the S&P 500:
This year, the fund has beat the market with impressive returns from such spin-offs as Madison Square Garden (MSG) and Marathon Petroleum Corp (MPC).
Total performance is equally impressive over several historical periods:
- YTD Return: 18.9%
- 1 Year Return: 21.1%
- 3 Year Return: 59.0%
- 5 Year Return: 5.0%
These figures include dividend income as well as capital appreciation.
Does Spin-Off Investing Have Legs?
It isn’t enough simply to find funds that have historically outperformed and invest without any further analysis. When it comes to funds and their management or strategy, we can test the investment strategy for logic to see if it can truly outperform.
Here’s a quick run through the strategy:
- Spin-offs tend to be poorly researched by investors. We know that unlike an IPO, a spin-off usually flies under the radar of press and institutional investors. The small size and lack of attention leads to less scrutiny from active investors, leaving a honey hole for investors who can analyze the market. Market-beating manager Joel Greenblatt is well-known for his interest in spin-offs as a source of value on Wall Street.
- Spin-offs are usually done by force. A spin-off allows businesses to divide balance sheets, separate two companies that are dissimilar, or to create additional value for shareholders by letting a subsidiary company stand on its own merit. Seeing as many spin-offs are the result of an activist board that wishes to maximize shareholder value, it would only follow that a spun-off company is initially sold at a discount because the market was not fully valuing it before the event. In the months that follow, the company is better understood and valued by Wall Street than it was as a part of a conglomerate.
- There is a continuous supply of spin-offs in the market, which lets us know that this strategy will be just as workable 10 years from now as it is today. Late 2012 and early 2013 will bring new spin-offs from very high-profile companies including Abbot Laboratories (ABT), News Corp (NWSA), Dean Foods Company (DF) and others.
- Spun-off companies are smaller than their parent companies. This leads us to the understanding that any spin-off strategy will invest primarily in smaller companies than an average index fund. Smaller companies have historically provided much larger total returns than large cap stocks. The fund states specifically that it will invest in stocks with sub-$10 billion market caps.
The Claymore/Beacon Spinoff ETF (CSD) is best when it can remain as small as it is today. With only $40 million in assets under management, this small fund can navigate a relatively niche corner of the market without much struggle. Traditionally, asset managers have preferred to hold positions in companies that have a market cap equal to or greater than assets under management. The amount of assets invested in Claymore’s Spinoff ETF (CSD) are not yet causing asset drag on this market-beating ETF. Fees totalling .6% per year are more than fair for this high performer.
Fund size doesn’t appear to be limiting liquidity for individual investors. With average trading volume of 10,709 shares per day in the latest month, the fund is more than liquid enough for individual investors with a long-term focus. CSD is just one of many new alternative ETFs we’ve seen emerge in recent years which doesn’t replicate a common mutual fund or stock sector. Investors are increasingly drawn to themes with lower correlation to traditional asset classes, especially when they exceed the returns of major market indices.
The bottomline: the Claymore/Beacon Spinoff ETF (CSD) uses a unique and proprietary strategy that delivers market-beating total returns for a light annual expense. The fund’s capacity to deliver stellar returns appears to be infinite as spin-offs have historically outperformed, and the supply for spin-offs is virtually limitless.
Disclosure: No positions in any tickers mentioned here.