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All the special situation outperformance with none of the hassle

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December 26, 2012 – Comments (0) | RELATED TICKERS: CSD

Back in June 2010 I heard about an ETF that invests only in the stock of spun-off companies, the Claymore/Beacon Spin-Off ETF (CSD).  As a huge fan of special situation investing in general and specifically spinoffs, I found this isea fascinating and immediately gave it the thumbs up here in CAPS.  So how has this ETF done over the past two and a half years?

Gain/Loss: +53.82%

S&P Gain/Loss: +31.98%

As you can see, exceptionally well!  That's much better than I would have thought.  This seems like a great set it and forget it type of investment for people who like the idea of special situation investing, but don't feel like messing with the research and buying the individual positions.  Here's the ETF's current top ten holdings for anyone who's interested:

According to Yahoo! as of 11/29/12:

Top 10 Holdings (55.27% of Total Assets)

LIN TV Corp Common Stock (TVL): 7.48%

Marathon Petroleum Corporation (MPC): 6.02%

Marriot Vacations Worldwide (VAC): 5.87%

First American Corporation (FAF): 5.7%

AMC Networks Inc. (AMCX): 5.5%

Fortune Brands Home & Security (FBHS): 5.38%

Liberty Media Corporation (LMCA): 5.18%

Howard Hughes Corporation (HHC): 4.93%

Madison Square Garden (MSG): 4.75%

Exelis (XLS): 4.75%

Given the amazing outperformance, I felt the need to do some additional research on this ETF.  Here's a description of it from Guggenheim Investment's website:

The Guggenheim Spin-Off ETF (NYSE Arca: CSD), seeks investment results that correspond generally to the performance, before the Fund’s fees and expenses, of an equity index called the Beacon Spin-off Index (the “Spin-off Index” or “Index”). The Fund will invest at least 90% of its total assets in common stock, American depositary receipts ("ADRs") and master limited partnerships ("MLPs") that comprise the Index and depositary receipts representing common stocks included in the Index (or underlying securities representing ADRs included in the Index). Guggenheim Funds Investment Advisors, LLC (the “Investment Adviser”) seeks a correlation over time of 0.95 or better between the Fund’s performance and the performance of the Index. A figure of 1.00 would represent perfect correlation.

The Fund, using a low cost “passive” or “indexing” investment approach, seeks to replicate, before fees and expenses, the performance of the Spin-off Index. The Spin-off Index is comprised of approximately 40 securities selected, based on investment and other criteria, from a broad universe of U.S.-traded stocks, ADRs and MLPs. The universe of companies eligible for inclusion in the Index includes companies that have been spun-off within the past 30 months but not more recently than six months prior to the applicable rebalancing date), without limitations on market capitalization (including micro-cap securities), but which are primarily small- and mid-cap companies with capitalizations under $10 billion. Beacon Indexes LLC (“Beacon” or the “Index Provider”) 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.

It's interesting that the fund has to wait six months before investing in the stock of a spun-off company.  I wonder why that is?  I wonder if that helps the fund or hurts it.  Traditionally, the shares of many spinoffs have dipped after they became newly independent companies as shareholders of the much larger entity discard them.  Lately, however that often does not seem to be happening.  This may be due in large part to the number of hedge funds out there scooping up shares of perhaps just the increased awareness of the outperformance of spinoffs.

Here's an updated list of CSD's holdings, this one from 12/24/12:

PHOENIX NEW MEDIA LTD -ADR  4.93 %

FIESTA RESTAURANT GROUP  4.83 %

ROUSE PROPERTIES INC  4.75 %

HUNTINGTON INGALLS INDUSTRIES  4.60 %

SUNCOKE ENERGY INC  4.58 %

FORTUNE BRANDS HOME & SECURITY INC.  4.57 %

TRIPADVISOR INC  4.56 %

MARATHON PETROLEUM CORP  4.48 %

ATLAS RESOURCES PARTNERS LP  4.48 %

POST HOLDINGS INC  4.47 %

Man, there sure has been a lot of spinoffs lately.  At $29.53, CSD is currently only trading at a tiny premium to its net asset value of $29.45 and the ETF's expenses are capped at 0.60 %.  So this seems like a reasonable way to play this type of special situation.  Interesting stuff.  I'm going to continue to keep an eye on it here in CAPS.

Thanks for reading everyone.  Happy Holidays.

Deej

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