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Market Vector Rolls Out a Spin-Off ETF - ETF News And Commentary

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The niche ETF concept has been at the top of every issuer’s mind lately. There is hardly any scope for plain vanilla products in this rapidly growing industry. Moreover, these unique investing options give investors a scope to play the various areas of the market in basket form, using strategies that are usually hard to reproduce in a regular-themed portfolio. Probably, inspired by this sentiment, Market Vectors recently rolled out a spin-off ETF (SPUN).


SPUN in Focus


The fund tracks the Horizon Kinetics Global Spin-Off Index and comprises approximately 87 multi-cap securities belonging to the developed world. The universe of companies eligible for inclusion in the Index includes those that have been spun off (see all total market ETFs here).


As per the summary prospectus, “for each company, an early entry at the start of the spin-off cycle aims to exploit valuation disconnects caused by selling pressure and pricing inefficiencies. A long-term hold seeks to capture periods of improved operating efficiency.”


The fund does not appear to be concentrated on the top 10 holdings as no stock accounts for more than 1.64% of the basket. Among individual holdings, Global Brands Group Holding Ltd, Prothena Corp Plc and Indivior Plc occupy the top three positions in the fund, which has a net expense ratio of 0.55%.


In terms of sector allocation, the ETF has double-digit allocation each in Consumer Discretionary, Financials and Industrials with 25.2%, 19% and 18.5%, respectively. Geographically, the fund is heavy on the U.S. with more than 65% exposure while the U.K. (6.5%) and Australia (5.5%) come in as the distant second and third.


How Does it Fit in a Portfolio?


In a spin-off, a company detaches certain assets to make a separate company and 'spins off', or hands out shares in that entity to the current shareholders. The most usual cause of a spin-off procedure is that the stock price of a big diversified company is unable to reciprocate the fair value of all its branches of operations.


These could actually be among one of the top performing assets in the market. This is true for SPUN which actually reflects the full-phase of the separated companies. The issuer noted that such entities normally underperform in the earlier phase of their life-cycle due to the absence of historical performances, dearth of analyst coverage, inferior peer comparisons and market cap issues.  


However, over the long term, these entities trend to perform better on availability of historical results and the consequent perfection in the analysts’ reports. Better management often makes these lucrative bets. Thus, from the long-term perspective, the fund might be well liked by investors (read: 5 ETFs for Your 2015 IRA Contribution).


ETF Competition


The coast is clear for this newly launched ETF as it has to compete with just one ETF namely Guggenheim Spin-Off ETF (CSD). Otherwise there is no meaningful player in this space. This fund tracks the Beacon Spin-off index which looks to focus on about 40 companies that have been spun-off within the past 30 months, but not before six months prior to the applicable rebalancing date (read: Kraft Food Buyout Put These ETFs in Focus).


The fund charges 66 bps in fees (net) which much lower than the newly ETF. Thus, from the expense ratio point of view, SPUN scores a point over CSD. Moreover, CSD has moderately heavy concentration risk with the top four holdings taking 5% to 6% each. Thus, we see no hurdle for SPUN in garnering investors’ money.


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