Make Money in Spinoffs the Easy Way
Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you like the idea of investing in spun-off companies because many of them are being spun off to unlock value, the Guggenheim Spin-Off ETF (NYS: CSD) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.
ETFs often sport lower expense ratios than their mutual fund cousins. The spinoff ETF's expense ratio -- its annual fee -- is 0.65%. That's a bit higher than that of many ETFs, but also considerably lower than that of most stock mutual funds. The ETF is small, too, so if you're thinking of buying, beware of occasionally large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.
This ETF has performed reasonably well, roughly matching the S&P 500 over the past five years, on average, and beating it over the past three. But it's also very young, with just a few years on the books. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
With a low turnover rate of just 2%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.
What's in it?
Plenty of past spinoffs had strong performances over the past year. Philip Morris International (NYS: PM) , for example, gained 39%, and has rosy prospects as economies around the world develop, creating many more middle-class people who can afford to smoke. It also doesn't hurt that many foreign countries don't tax and regulate tobacco as much as the U.S. does. Retailer HSN (NAS: HSNI) advanced 18%, beating Wall Street expectations as its online sales grew and it began paying a dividend. Philip Morris was spun off from Altria, and HSN was spun off from IAC, both in 2008.
Not every spinoff was a winner, though. Lender Processing Services (NYS: LPS) , spun off from Fidelity National Information Services in 2008, shed 32%, as its business processing foreclosures and new home loans dried up a little. Its future is a bit murky, as interest rates that will inevitably rise one day will hurt it, and a recovering housing market will slow foreclosures. It's also being sued by the state of Nevada for alleged improper behavior. TeleCommunication Systems (NAS: TSYS) , spun off from Synovus in late 2007, fell by 35% over the past year. The company's revenue grew in 2011, although its net income slipped. Its funded backlog, though, rose by 40%.
The big picture
A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
At the time this article was published Longtime Fool contributorSelena Maranjian, whom you can follow on Twitter@SelenaMaranjian,holds no position in any company mentioned.Click hereto see her holdings and a short bio. The Motley Fool owns shares of Altria Group and Philip Morris International and has sold shares of Lender Processing Services short.Motley Fool newsletter serviceshave recommended buying shares of Philip Morris International. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.