CSD Switching Indexes
All things considered, the return for these spinoff ETFs has been mixed, at best. Now the question is whether they can outperform going forward.
Guggenheim, the issuer of CSD, hopes that by changing the underlying index for its ETF from the Beacon Spin-off Index to the S&P U.S. Spin-Off Index, it will have a positive effect on returns. The change goes into effect on May 20.
Under the current Beacon index, the ETF holds companies that spun off within a two-year period of 30 months ago to six months ago. The index rebalances semiannually, and holdings are ranked based on a multifactor process, with a maximum weighting of 4.5% for any individual stock.
New Index Has Outperformed
In contrast, the new S&P index will include companies that have spun off within the last four years, and it is rebalanced monthly. Additionally, the index is market-cap-weighted. All stocks in the index must have a market cap of at least $1 billion, and the maximum weighting for any individual name is 7.5%.
The current top holdings for the S&P U.S. Spin-Off Index include Baxalta Inc., Hewlett Packard Enterprise Co. and The Kraft Heinz Co. On the other hand, the top holdings for the Beacon Spin-Off Index are Allegion PLC, Brookfield Property Partners and Liberty Media Corp.
While it may not seem like a drastic change, the new index for CSD could have a significant impact on returns going forward. Consider what's happened in the past: Since 2007, the return for the S&P index is a whopping 2.6 times what it is for the Beacon index.
Returns For S&P US SpinOff Index & Beacon SpinOff Index Since 2007
The S&P index is also significantly outperforming in the year-to-date period, with a gain of more than 6%, compared to 3% for the Beacon index.
SPUN Uses Global Index
Meanwhile, the newcomer to the space, SPUN, uses a third, completely different index to dictate its holdings―the Horizon Kinetics Global Spin-Off Index. As the name implies, this index holds shares of spun-off companies from around the world, including the U.S., Western Europe and developed Asia.
The Horizon index holds spun-off companies for five years and equal-weights them.
Year-to-date and over the past decade, SPUN's Horizon Index is beating the CSD's current Beacon Index. But it's been no match for the S&P index, which is at the top of the pack.
CSD Has Leg Up On SPUN
Of course, past performance is no guarantee of future results. For investors attracted to the spinoff strategies of CSD and SPUN, they must make a choice between two ETFs with distinct underlying indexes.
CSD gets a leg up based on the winning history of the S&P U.S. Spin-Off Index and the fund's much deeper liquidity. SPUN, which currently has anemic trading volume and few assets, must prove that it and the Horizon Spin-Off Index are the better bet for investors.
Contact Sumit Roy at [email protected].