MERFX Stands Out for Diversification | ETF Trends

This year, there’s been considerable talk about the death of the 60/40 portfolio structure. More recently, the chatter shifted to the notion that those 60/40 obituaries may have been penned prematurely, but the stark reality is that broad-based equity and fixed income strategies are failing investors this year.

Novice investors may be inclined to think that due to 60/40’s rough go this year, the case for diversification is suffering. Actually, the opposite is true, but the time is right to consider unique avenues for diversifying portfolios. That effort can include merger arbitrage, which is accessible via the Merger Fund (MERFX).

MERFX is all the more relevant as a diversification tool at a time when the broader bond market is in the midst of one of its worst 27-month stretches on record. Compounding those woes is the fact that aggregate bond indexes will likely follow the S&P 500 lower this year — something that didn’t happen the prior eight times the benchmark domestic equity gauge slumped on an annual basis.

One way of looking at those statistics is that diversification still matters, but it’s a matter of properly harnessing it.

“Diversification is always important, but during long bull markets, that concept often falls on deaf ears. During the 40-year secular bull market in bonds that ended in 2020, owning the total bond market would have served you quite well (+7.6% annualized return from January 1981 – December 2020 in Bloomberg U.S. Aggregate). And during the final two years (+8.7% in 2019 and +7.5% in 2020), the gains made diversification seem entirely unnecessary,” noted Charlie Bilello of Compound Capital Advisors in report for Virtus.

Underscoring the potential diversification benefits of MERFX is that the actively managed mutual fund helps investors expand beyond diversification in bonds (credit or duration) and within equities (growth, value, etc.). This year, those type of shifts are simply resulting in less bad outcomes, in most cases.

With that in mind, some frustrated investors may be tempted to just go to cash and wait out a rocky market setting, but that’s not all it’s cracked up to be.

“It’s tempting during such times to move entirely to cash, which has handily beaten both stocks and bonds in 2022. But this is short-term focused and backward looking. As your time frame lengthens, the odds that cash will be the best performing asset class decline considerably,” added Bilello.

Bottom line: This could be an ideal time to consider alternative strategies, with merger arbitrage being part of that conversation.

“And just like back then, this was an opportune time to seek diversifiers with a low correlation to either asset class. We’ve seen that in spades thus far in 2022, with areas like managed posting gains amidst the downturn in stocks and bonds,” concluded Bilello.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.