Spinoffs draw investor excitement, but do they deliver for investors?
Last week’s news that Honeywell would spin off two divisions and Pfizer was reportedly considering spinning off its consumer health brands gave two spin off-based exchange-traded funds a mild boost on the news.
In the case of Honeywell, the conglomerate said it it will spin off its home and global distribution unit and transportation division into two separate publicly traded companies because it wanted to focus on its core businesses. The two ETFs tracking corporate spinoffs, the Guggenheim S&P Spin-Off ETF (CSD) and VanEck Vectors Global Spin-Off ETF (SPUN), saw a mild bounce—with SPUN seeing a slightly higher bounce that CSD.
Companies will spin off parts of their operations for various reasons, but it’s often to narrow their focus on core businesses, says Joe Cornell, principal at Spin-Off Research. Spun-off divisions become separate, publicly traded companies and issue new stock, and depending on how it’s structured the parent company avoids the tax bills they might otherwise incur if it sold the business unit.
Robert Reid, senior equity analyst at Briefing.com, says spun-off divisions help unlock the value of growth segments which can be hidden in conglomerate companies.
“These segments get morphed into the parent and they’re not getting their full valuation otherwise,” Reid says.
In the first two to three years of existence, spun-off firms can outperform the broader market because they’re unshackled from the parent company and are run by management focused solely on the growth of that particular business, Cornell says.
Of the two ETFs tracking this space, CSD is older—having launched in 2006—and has more assets under management at $206 million. It’s up 18.7 percent year-to-date, while its one-year return is up 26 percent and its 10-year average is up 7.3 percent. It’s a market-cap weighted index and follows the S&P U.S. Spin-Off Index. It has an expense ratio of 0.65 percent and a yield of 1.5 percent.
SPUN launched in June 2015. It has a slightly lower expense ratio, at 55 basis points. It has $5.9 million in AUM and a yield of 1.4 percent. It’s up 13.8 percent year-to-date and its one-year performance is up 21 percent.
When compared to the SPDR S&P 500 ETF (SPY), CSD is outperforming on a year-to-date and one-year return, while SPUN is underperforming. SPY is up 16 percent year-to-date, with a 22.1 percent one-year return and a 10-year return of 7.45 percent.