One of the best new ETF's seems to be the Claymore/Clear Spin-Off fund (CSD). It started half a year ago and it invests in 40 US companies that recently started as a spin-off of other companies. It is unclear how it selects these 40 companies among all spin-offs.

When such a spin-off company becomes independent from its mother company shareholders of the mother company often sell the shares of the spin-off.  Often because investing in the spin-off was not what they planned to do anyway and sometimes because they only want to invest in bigger (blue chip) companies. Or they might only want to invest in value stocks, while spin-off stocks are usually growth stocks.

This sell-off makes the spin-off typically undervalued. But how does the CSD fund time its purchases ? All we know is that the CSD fund is rebalanced twice a year. I hope that this implies that the fund buys its spin-offs shortly after shareholders of the mother company have sold instead of before.

Meanwhile the management (and employees) of the spin-off makes a fresh, new start and tries to make some important changes and restructuring, that were often previously not possible. The management is usually well motivated with a new package of share options. At some later time the benefits of these changes appear to the public and the share price goes up. It is unclear when the CSD fund decides when it is time to sell the spin-off.

I am always sceptical about such fundamental strategies. In this case the timing is probably very difficult: when to buy the spin-off and when to sell it again. Selecting which spin-offs to buy is difficult as well. 

However the strategy seems to work out very well for the CSD fund: in its first half year the fund went up from $25 to $31 which is 24% (53% annualized). The CSD fund outperformed major US indices such as the Dow Jones Index, the S&P 500 and the Nasdaq. In addition the fund outperformed a number of other funds, such as DFE (WisdomTree European Small-Caps Dividend) and EEM (iShares Emerging Markets Fund).

The question remains how this strategy performs in a bear market: are there enough spin-offs to choose from and do they go up more than the market just as in a bull-market.