I'm not the biggest fan of exchange traded funds, or ETFs, which are essentially baskets of stocks compiled to support an investing theme. Yet the appeal of ETFs has mushroomed as they have become an indispensable tool for both individual investors and financial advisors.
It's not difficult to see why the popularity. Want to bet against rising interest rates? There's an ETF for that. Want to own the biggest tech stocks in one basket? There's an ETF for that. In fact, one day there could be an ETF that allows you to bet on the price of bitcoins.
I have found one ETF, however, that not only has the potential to spin out profits for years; it also provides investors with an easy way to find quality ideas in the particular stocks held by the fund. I'm referring to the Guggenheim Spin-Off (CSD) exchange traded fund.
CSD invests in spinoffs. For years, spinoffs have consistently been one of the most fertile investment ideas. Spinoffs occur for one primary reason. The larger parent company seeks to spin off a smaller division so that investors and analysts can get a clearer view of the larger parent.
Post spinoff, the parent company usually becomes more "profitable" because its core earnings are no longer affected by results of the entity spun out. Conversely, the spinoff business is a gem which is not being properly valued in the market as part of a larger organization. So the entity is spun out in hopes that the sum of parts is greater than the whole.
What the investor needs to grasp to appreciate the potential value in spinoffs is that investors aren't usually interested in the spinoff, but the original business. So when a company is spun off, investors usually sell of the shares spun off to them to monetize it and to hold on to the original investment. This exodus can cause overselling, which can lead to a mispricing in the spun out entity.
The Guggenheim Spin-Off ETF invests in these spinoffs. The ETF is up over 30% this year, crushing the S&P. The fund also is a great place to look for potentially lucrative spinoff ideas. The fund's top holding is Fiesta Restaurant Group (FRGI) a group of Mexican restaurants that was spun out from Carrols Restaurant Group (TAST), a company that now only owns Burger King restaurants. A couple of years ago I wrote about the old Carrols when it was trading for under $10 a share. Today, Carrols trades for less than $6 but the spun out Fiesta trades for $34 a share.
Other names held by Guggenheim include Phillips 66 (PSX), TripAdvisor (TRIP), Huntington Ingalls Industries (HII), and Post Holdings (POST), all of which were spun out from parent corporations.
You can certainly let the ETF do the picking for you and just own the whole basket, or use it for an excellent source of ideas in today's market. Either way, spinoffs are a very attractive area of the market that is consistently being overlooked by most investors.
