IPO & Spin-off ETFs and Their Underlying Indexes – IPO, CSD

The hypothesis that the IPOs & Spin-off companies tend to outperform in the long run is well established and traded upon by practitioners. They argue that newly listed companies usually are under-valued because of its novelty and small size in the very beginning. The spin-off, more able to be focusing on their niche and core competitive advantage, ought to bring a better return for investors, yet, often times, they are overlooked by the market and more attention is paid to large players.

Packing this kind of stocks into an IPO&Spin-off ETF form is a sound idea and has been tried out by indexers and fund issuers already. IPO and CSD are two of them on the market now.

Guggenheim S&P Spin-Off ETF, CSD is based upon S&P U.S. Spin-Off Index. It was launched on 12/15/2006 and has since accumulated $204 Million as of March 2017. There are 58 holding companies at that time.

With regard to its index methodology, it starts from the S&P U.S. BMI, Spin-offs and Split-offs that are added to the U.S. BMI and have a float-adjusted market capitalization of at least $1 billion are added to the S&P U.S. Spin-Off Index and remain in the index for up to four years. The index is float-adjusted market capitalization weighted, subject to a cap of 7.5% on the weight of any single stock.

The index will include additional components on a monthly basis. Any eligible spin-offs occurring at least seven business days prior to the rebalancing date are included in the index at the monthly rebalancing.  Constituents are kept for a maximum of 48 months, i.e. 4 years. However, if it is not eligible in the S&P U. S. BMI universe, it will be taken out on the next rebalancing. Under some circumstances, when the deletion of a constituent at the monthly rebalancing results in a constituent count of less than 20, the deletion will be delayed until the next rebalancing period in which the resulting constituent count would be at least 20. (Referencing the S&P U.S. Spin-Off Index methodology)

Now, look at the IPO ETF, which is based off on the Renaissance IPO index series with a global coverage segmented into U. S. IPOs, and Emerging Markets IPOs and more. Index constituents will be held for two years, and then removed from the FTSE Renaissance Global IPO Index, unless a corporate action or failure to satisfy the three screens triggers an earlier elimination.

Take a dive into their performance in the past.

With a longer time horizon, we can see CSD has a fair performance relative to the market (i.e. S&P500) and achieved some stellar performance during a period between 2012 and 2016; it is still outperforming SP500 by late spring of 2017. IPO, conversely, delivered a lackluster result to its investors.


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