As the markets continue to strengthen, mergers and acquisitions between U.S. companies are rising. Investors can capitalize on the increased activity through a couple of exchange traded funds that focus on merger arbitrage.
Year-to-date, almost $300 billion in deals between U.S. companies have been announced, or up 10% for the same period year-over-year, reports Murray Coleman for the Wall Street Journal.
The market returned to more than $1 trillion in M&A activity over 2013, the first time since before the 2008 financial crisis. Richard Peterson, an analyst at S&P Capital IQ, predicts that M&As in 2014 could hit a high not seen since 2006’s record $1.7 trillion in domestic deals. [M&A Pickup Pushes This ETF Higher]
Peterson points to the Index IQ Merger Arbitrage ETF (NYSEArca: MNA) as a good way to gain exposure to the increased activity.
“We’re seeing a more healthy U.S. M&A market, particularly in the consumer-discretionary and health-care sectors,” Peterson said in the WSJ article.
Corporations have been sitting on record stash of cash. Overall corporate spending on fixed investments have been at below average annual growth rates dating back to at least 1990, according to Joe Zidle, a portfolio strategist at Richard Bernstein Advisors.
“We’re still in the early innings of a pickup in deal-making activity, which makes this a prime time for investors to devote a portion of their portfolios to M&A funds,” Zidle said in the article.
Additionally, M&A funds also provide a diversification factor to an investment portfolio. According to Morningstar, these types of funds are 0.66 correlated to the S&P Index – investments move perfectly in lockstep when correlation is at 1.0. Additionally, funds that arbitrage a broad range of markets like M&A have a correlation of 0.25 to the S&P 500.
Investors can also take a look at the two other merger arbitrage exchange traded products available: the Credit Suisse Merger Arbitrage Index ETN (NYSEArca: CSMA) and ProShares Merger Arbitrage ETF (NYSEArca: MRGR).
Merger arbitrage ETFs includes stocks of target companies in anticipation of earning a premium paid for the targeted stock once an announced deal closes. Additionally, it takes short positions in some acquirers as a potential hedge in the acquirer’s stock.
MNA has gained 9.1% over the past year while CSMA increased 1.7%. MRGR is off 0.3%.
Index IQ Merger Arbitrage ETF
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