The Claymore/Clear Spin-Off fund
Potential set free
The reason spinoff companies might be worth including in your portfolio is that once they are unleashed from their corporate parents, these companies are free to focus more attention on their core businesses and maximize their market value. Another factor that may favor spinoffs is that managers have greater freedom to reduce unnecessary overhead and pursue promising new ventures. Stock options can more directly compensate management and, used correctly, can boost stock valuation. The push for a higher stock price may also come from workers who can now see their labor, and compensation, pay off more directly in a rising stock valuation.
Wall Street waif
Spinoffs tend to draw a lot less attention from Wall Street than do IPOs or other trends of the day. Institutional investors may ignore spinoffs for a number of reasons, such as a market cap that does not meet their requirements. That neglect might be a good thing and provide potential profit opportunities.
Breaking up isn't always easy
Not all spinoffs are the same, since some companies increase their value at the time of the spinoff, while others may stagnate or decrease over a longer period. Companies that do well after a spinoff may need to restructure their business and focus on their core initiatives.
The individual parts of a company are not always worth more when they are separated out. Corporations may jettison underperforming assets and take the opportunity to pile on debt and liabilities. Sometimes, it is the corporate parent that does well, and other times, it is the child.
Like many new ETFs coming to market these days, CSD is a niche fund that tracks a unique index. That specialization can make these funds a beauty or beast to hold and put an entirely different spin on your investment. CSD will usually hold only 5% of a stock, so exposure to any one company can rise only so far. Although it is not diversified as much as a broad-based index fund, CSD is more diversified than many ETFs that are focused on obscure market nooks and crannies or concentrated in a particular sector. The CSD story seems interesting and potentially profitable, but like a lot of its focused brethren, allocations to this fund should be only a small percentage of an investor's overall portfolio.
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Fool contributor Zoe Van Schyndel lives in Miami and enjoys the sunshine and variety of the Magic City. She does not own any of the funds or stocks mentioned in this article. The Motley Fool has a disclosure policy.