2 Quant Based ETFs That Work Very Well Together

Sep.10.13 | About: Guggenheim S&P (CSD)

Today I'd like to suggest 2 ETFs that, if held together, complement and enhance one another. This 112 stock fund pairing in theory provides a way to unlock additional gains from a couple of ETFs that are already outperforming on their own and participate in similar investment theories. In my model I used a 50/50 split between the 2 funds which operate in the IPO and "partial IPO" markets. The ETFs being addressed in this article are the First Trust IPOX-100 Index Fund (NYSEARCA:FPX) and the Guggenheim Spin-Off ETF (NYSEARCA:CSD).

First Trust IPOX-100 Index Fund

I view this as the core ETF of the pair. It is a rules based value-weighted index measuring the average performance of U.S. IPOs during the first 1,000 trading days (entering the index no earlier than after 5 days of trading). The top 100 IPOs are ranked quarterly. FPX does not include stocks that gained over 50% in their first day of trading which helps mitigate a bit of risk. It is a low-risk, diversified way to play the IPO market.

The Guggenheim Spin-Off ETF

CSD seeks to capture the performance of companies that have been spun-off within the last two years. Spin-offs are created by companies that have separated and sold off a portion of their business as a new entity. This process often times unlocks value: smaller, targeted companies are more flexible and can dedicate all of their resources towards their core operations, potentially allowing investors to capture the performance of a more efficient and profitable company. It is an interesting way to play the "partial IPO" market.

Shared Positions

FPX holds 100 positions while CSD has 24. As of August 31st the 2 funds have 12 companies in common, that represents half of CSD's holdings. This is partially why these two funds have the ability to enhance each other. These shared positions are as follows:

Ticker Name Industry FPX % CSD % Combined %
(NYSE:PSX) Phillips 66 Energy 4.5% 4.0% 4.3%
(KRFT) Kraft Foods Group Inc Consumer Staples 3.9% 4.3% 4.1%
(NYSE:MPC) Marathon Petroleum Corp Energy 3.0% 4.0% 3.5%
(NASDAQ:TRIP) TripAdvisor Inc Consumer Discretion 1.2% 5.1% 3.2%
(NYSE:FBHS) Fortune Brand Home and Securities Industrials 0.8% 4.2% 2.5%
(NYSE:XYL) Xylem Inc Industrials 0.6% 4.0% 2.3%
(NASDAQ:AMCX) AMC Networks Inc Consumer Discretion 0.5% 4.3% 2.4%
(NYSE:WPX) WPX Energy Inc Energy 0.5% 4.4% 2.5%
(NYSE:HII) Huntington Ingalls Industrials Industrials 0.4% 5.0% 2.7%
(NYSE:XLS) Exelis Inc Industrials 0.4% 5.4% 2.9%
(NYSE:VAC) Marriott Vacations World Consumer Discretion 0.2% 4.5% 2.4%
(NYSE:POST) Post Holdings Inc Consumer Staples 0.2% 4.3% 2.3%
16.2% 53.5% 35.1%
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These shared positions hold a little over half the weight in CSD but only 16% of the weight in FPX - understandably, since this sample size represents 50% of the stocks in the CSD portfolio and 12% of the stocks in the FPX portfolio. These shared positions are 35% of the combined fund.

If you're happy with FPX by itself you are likely to like it in this combination as the holdings remain somewhat stable in ranking. A prior CSD shareholder would see the appropriate 50% dilution in most CSD holdings except for PSX, KRFT and MPC, as they ranked fairly high amongst IPOX and not so much with CSD.

Industry Allocation

Industry FPX Allocation CSD Allocation Combined Allocation

Consumer Discretion

26% 27% 27%
Information Technology 20% 15% 18%
Energy 17% 20% 18%
Health Care 15% 0% 8%
Industrials 8% 19% 13%
Financials 7% 4% 6%
Consumer Staples 6% 9% 7%
Materials 1% 6% 3%
Click to enlarge

Most notable is that there is no Health Care in CSD. The tradeoff is a heavier weight in Industrials which FPX benefits from. Both funds have Consumer Discretion, Information Technology and Energy as their top 3 industry allocations and thus they remain the top when combined.

Once again, if you're happy with the industry allocation of FPX by itself then you are likely to still like it when combined with CSD. Consumer Discretion is the top allocation across the board, with about 1/4 of the allocation.

So why does FPX need CSD?

FPX and CSD both have 50% of their weight in their respective top 10. By combining the two funds, that number is decreased down to 37%. Additionally CSD provides credence in weight with a pseudo-track record from IPOs that have been split-off from already established companies.

So why might now be the best time to combine FPX and CSD? 2 reasons: Facebook (NASDAQ:FB) and Tesla (NASDAQ:TSLA). Both stocks have been on fire in the past several months, making now the perfect time to leverage out of those positions. FB and TSLA currently hold the #1 and #8 positions in FPX, with a weight of 11% and 3%, respectively. By having a 50/50 split amongst FPX and CSD you're effectively reducing your position in FB and TSLA by 50% in each company without disposing of any of your shares in the IPO space.

So why does CSD need FPX?

As noted, CSD only holds 25 companies so it is somewhat concentrated without the enhancement of a second ETF. FPX provides a broader reach into the IPO markets and adds additional exposure to the Technology and Health Care sectors.

Another frequent complaint about CSD is that it takes too long to add companies to the portfolio. The universe of companies eligible for inclusion in the Index being tracked includes companies that have been spun-off within the past 30 months (but not more recently than six months prior to the applicable rebalancing date), whereas FPX may include a company after 5 days of trading after its initial public offering.

Top 20

If you like the concept of either FPX or CSD it isn't too much of a stretch to appreciate the other but ultimately it comes down to the holdings. Below you will find the top 20 holdings of an equal 50/50 split purchase of both FPX and CSD.

Ticker Name %
FB Facebook Inc 5.7%
(NYSE:ABBV) AbbVie Inc 4.3%
PSX Phillips 66 4.3%
KRFT Kraft Foods Group Inc 4.1%
MPC Marathon Petroleum Corp 3.5%
(NYSE:FENG) Phoenix New Media Ltd 3.5%
(NYSE:GM) General Motors Company 3.4%
TRIP TripAdvisor Inc 3.2%
XLS Exelis Inc 2.9%
HII Huntington Ingalls Industrials 2.7%
FBHS Fortune Brand Home and Securities 2.5%
(NASDAQ:STRZA) Starz 2.5%
(NYSE:KMI) Kinder Morgan Inc 2.5%
WPX WPX Energy Inc 2.5%
AMCX AMC Networks Inc 2.4%
VAC Marriott Vacations World 2.4%
XYL Xylem Inc 2.3%
(NYSE:SXC) Suncoke Energy Inc 2.3%
POST Post Holdings Inc 2.3%
(NASDAQ:LMOS) Lumos Networks Corp 2.2%
61.5%
Click to enlarge

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.