Following a torrid pace in 2014, mergers and acquisitions activity is booming again in 2015. Sectors ripe for consolidation include energy, technology and, as usual, health care.
Last week, Citigroup forecast a 43% increase in global deal-making this year. To diminish the gap between stock price and deal-making, corporations will have to spend around $4 trillion in mergers and acquisitions this year, compared to $2.8 trillion in 2014, reports Bidness.etc.
Increased mergers and acquisitions could prove to be good news for merger arbitrage exchange traded funds such as the Index IQ Merger Arbitrage ETF (NYSEArca: MNA).
MNA and rival M&A ETFs provide investors with a diversified approach to a group of takeover targets. The ETFs employ a type of alternative, “directional hedge fund strategy” clled merger arbitrage. Specifically, the funds capture the spread or difference between a stock’s trading price before a deal is announced and its eventual takeover price. [A Look at M&A ETFs]
Said another way, M&A is not a bet on rumored takeover targets. While that means MNA does not always deliver jaw-dropping returns (the ETF has had its bouts of lagging the S&P 500), investors do gain the benefit of a favorable risk/reward scenario.
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’s strategy might “may sound a bit risky, but the strategy produces a calm, low-risk ETF. MNA has less than half the volatility of the S&P 500 Index. And it has a solid track record. It’s up 13 percent in the past two years, compared with 7 percent for the HFR Merger Arbitrage Index, which tracks merger arbitrage hedge funds,” reports Eric Balchunas for Bloomberg.
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. [Nifty Hedge Fund ETFs]
Top 10 holdings in MNA currently include Baker Hughes (NYSE: BHI), Allergan (NYSE: AGN) and Time Warner Cable (NYSE: TWC).
Investors have grown to like MNA’s story as the ETF has more than quadrupled in size to $100 million in assets under management over the past year, according to Bloomberg.
IQ Merger Arbitrage ETF
