Spin-Off ETF: Banking On The Implied Value of a Spin-Off

It would appear that there is no end to the creativity of exchange traded fund (ETF) providers. Proof of this comes to us from Claymore Securities Inc. with its introduction of an ETF that invests in spin-offs. This new ETF started to trade on the American Stock Exchange (AMEX) last week.

So what is a spin-off? The Claymore/Clear Spin-Off ETF (CSD) uses this definition: “A spin-off is a new company that's formed when a conglomerate sells stock in a subsidiary.” The motivation behind spin-offs is a belief that these new companies can focus on what is best for them rather than to worry about what is best for the parent company. In addition, executive compensation can be tied directly to the performance of the new company rather than being diluted with the performance of other divisions.

The rules for admission in to this ETF are as follows:

  • Must have been spun off within the previous two years.
  • The stock must have been trading for at least six months.

Once the above selection has been made, the batch is cut down to a fixed 40 stocks, each representing a maximum cap of 5% of the portfolio. There is a hint of active management with this exchange traded fund as Claymore applies some analysis to determine which stocks are overweight.

The reasoning behind Claymore's creation of this ETF is that Wall Street is generally pessimistic about spin-offs and therefore ends up undervaluing them. They back up this claim by citing a Lehman Brothers study published back in February that found that the two-year gain of spin-offs outperformed the S&P 500 by 45% during the period of 2000 to 2005. In addition, a report from Goldman Sachs also found that spin-offs executed between 2000 and 2005 tended to outperform the S&P 500.

For more about the spin-off ETF, check out this press release and this one too.

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