Can This ETF Beat the Market?

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Since its inception in late 2006, Guggenheim's Spin-off ETF (NYSEMKT: CSD) has more or less mirrored the overall direction of the broader market while exceeding its returns. After debuting at an initial offering price of $25, it touched a high of $31.46 per share in July of 2007 before plummeting with the rest of the market to a low of $9.53 in March of 2009.

It has since recovered nearly all of its pre-recession value and now sits near $30 per share. Investors who purchased shares in the ETF during early 2009 have enjoyed a return of better than 200 percent on their investment. Since its inception, CSD has enjoyed a capital gain of about 20 percent. The fund also pays an annual dividend of $.39 per share. At current price levels, this represents an annual return of approximately 1.3 percent.

After accounting for expenses and fees, CSD aims to mirror the performance of the Beacon Spin-off Index. This index is comprised of a revolving basket of companies that have been spun off between six and 30 months prior to the current date. Since smaller spin-offs typically offer the possibility of greater returns, the Beacon Index is stocked primarily with small-cap and mid-cap names. Most of the index's spin-offs are either standalone divisions that have completely severed their ties with their former parent companies or subsidiaries that have recently executed partial IPOs. The fund actively seeks to profit from spin-offs with high potential rates of return.

In the past, the Guggenheim Spin-off Fund has held sizable positions in well-known companies like Dr. Pepper Snapple Group and Phillip Morris International. Both Dr. Pepper and Phillip Morris International have done well in the last year which has given a boost for the ETF.  Dr. Pepper has had an excellent return of 79% since its spin-off in 2008.  Phillip Morris has returned about the same amount since 2008.  The ETF has also held considerable positions in technology firms like VMWare and consumer-focused firms like Brinks Home Security. The bulk of its holdings are stocks and ADRs issued by U.S.-traded companies with operational bases in a range of developed countries. At any given time, up to 10 percent of its holdings may take the form of short-term interest-bearing investments or other liquid vehicles.

CSD's expense ratio is currently .6 percent. Although it tends to be more volatile than the broader market, its general uptrend has smoothed out its inherent volatility over time. It is unclear whether its relatively upbeat performance is due to the skill of its managers, the secular trends that favor spun-off companies, or the quality and stability of its core holdings.

The Guggenheim Spin-off ETF is currently the only ETF dedicated specifically to mirroring the performance of the Beacon Spin-off Index. In fact, it is the only ETF or ETN devoted to capturing the performance of a narrow basket of companies currently involved in spin-off deals. However, there are several other ETFs that seek to capitalize on the relatively hot market for mergers and arbitrage deals.

One key example of such a fund is IQ Global's Merger Arbitrage ETF (NYSEMKT: MNA). This fund holds long positions in a broad basket of takeover targets as well as short positions in companies representative of the broader market. While not specifically focused on spin-offs, it may occasionally hold positions in recently spun-off companies. Like the Guggenheim fund, it is not designed to mirror the performance of the broader market and may serve as a useful hedge during down markets.

Another similar fund is First Trust's US IPO Index ETF (NYSEMKT: FPX). This vehicle's holdings are comprised of newly-public stocks that have become available through IPOs or spin-offs. At any given time, there is considerable overlap between the holdings of FPX and those of CSD. For instance, both funds have held simultaneous positions in Phillip Morris.

CSD looks to perform well for as long as the market remains receptive to spin-off deals. It provides a clear advantage for investors who wish to take advantage of the booming spin-off market without risking exposure to any one deal. Since CSD maintains at least 25 active positions at any given time and rarely permits any single holding to exceed 7 percent of its total asset value, the ETF is well-diversified. With a market capitalization of about $2.5 billion, it is one of the larger specialty ETFs.

It is also worth noting that CSD currently benefits from an expense cap that will remain in place until December 31, 2013 and serves to boost its annual returns. Investors looking to take advantage of CSD's solid post-recession performance may wish to make their moves sooner rather than later to avoid getting caught up in any uncertainty surrounding the expiration of this cap.

 


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