As more global companies put their cash hoards to work through merger and acquisition deals, market consolidations could help an exchange traded funds that focuses on profiting from M&A activity.
The increased M&A activity could help boost related ETFs like the Index IQ Merger Arbitrage ETF (NYSEArca: MNA), Credit Suisse Merger Arbitrage Index ETN (NYSEArca: CSMA) and ProShares Merger Arbitrage ETF (NYSEArca: MRGR). For instance, some investors have already positioned ahead of the stronger M&A activity, with MNA seeing assets rise 44% since the start of the year. The IQ Merger Arbitrage ETF has attracted $37.1 million in net inflows so far this year, according to ETF.com.
The 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” called 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.
For instance, Royal Dutch Shell recently announced a takeover bid of the BG Group worth $70 billion, or $20 per share, reports Bryan Borzykoski for CNBC. BG Group was trading around $18, and as the deal gets closer to completion, the stock price should rise to $20.
With economies strengthening, merger and acquisition activity should pick up and increase the pool of potential opportunities for a M&A fund strategy. According to Ernst & Young, 56% of global companies plan on acquiring another business in the next 12 months. Global deal values are already 13% higher so far this year and the number of deals in the pipeline is up 19% year-over-year.
“We’re in the early stages of a pretty robust deal environment that will go on for several years, assuming that there’s no calamity in the markets,” Adam Patti, CEO of IndexIQ, said in the article. “Interest rates will remain low for quite some time, and companies want to put their cash to work.”
The M&A arbitrage strategy also provides an alternative to traditional equity investments since it generates returns that are typically uncorrelated to the stock market and volatility is fairly low. For example, the S&P 500’s annualized standard deviation is around 18%, whereas MNA shows a standard deviation of about 5%.