By Salvatore J. Bruno, Chief Investment Officer and Managing Director, IndexIQ
The past decade has been one of the most robust in the history of mergers & acquisitions, with thousands of transactions encompassing trillions of dollars. While I would love to say we saw all of this coming at the time, we had no way of knowing just what sort of decade we were about to embark upon when we brought the IQ Merger Arbitrage ETF (MNA) to market on November 17, 2009, but planned or not, the timing has certainly been fortuitous.
MNA is designed to provide investors with a highly liquid, low cost way to invest in announced mergers and acquisitions. The goal is to benefit from the pricing inefficiencies that often occur when a deal target trades at a discount to the announced acquisition price, with the “spread” expected to tighten as the deal moves forward to the closing date. The strategy is designed to capture this price difference, and it’s incredibly exciting to now have 10 years of live track record to point to when we discuss this approach and what it can do for a portfolio.
MNA was something of a novelty at first. There were mutual funds that did something similar, but no merger arbitrage ETFs at that point, and certainly nothing that was delivering this type of exposure at so competitive a fee level.
As with QAI, which I’ve blogged about before, the initial phase of the fund’s growth was slow, but over time, as investors came to understand just what it was designed to do, the fund has grown to nearly $900 million in assets as of November 17, 2019. MNA had also earned a 5-star overall Morningstar rating as of September 30, 2019, from among 113 US Market Neutral Funds, which is yet another testament to MNA’s differentiated approach to identifying merger arb opportunities.
There are two main factors that determine returns for a merger arb strategy: deal premiums and completion rates. These can vary but have generally been relatively consistent over time. For their part, completion rates generally are very high. They can go through periods where regulatory scrutiny can make for a more difficult environment, but they tend not to vary based on market conditions, providing for meaningful diversification for an equity-based portfolio.
Deal flows do tend to follow the performance of the S&P 500, according to our research. But while a rising market correlates with more deals, there are other factors that drive M&A. Industry consolidation, global expansion, and the availability of massive amounts of private capital are important as well. Obviously, those have been some of the defining characteristics of the past decade and won’t last forever. However, by applying its rules-based process, MNA seeks to be well-positioned to provide and competitive returns through varying market environments.
So far, it has been the financial advisor community that has gravitated to MNA, looking to manage volatility and add uncorrelated returns to their clients’ portfolios. Advisors will always remain a key constituency for us and we are very excited to continue to tell the MNA story to more advisors as the fund moves into its second decade. Just as exciting is the institutional interest level around liquid alternative ETFs, like MNA, that appears poised to take off. A recent study that IndexIQ commissioned with Greenwich Associates showed that, among other major takeaways, institutional investments in liquid alternative ETFs will more than double over the next 12 months.
A decade of deal making, a decade of innovation in ETFs, and an eye on the future, helping all types of investors better understand just what MNA and other liquid alternative ETFs can do for their portfolios… it’s been quite a 10-year run, and we’re excited about what is still to come!
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Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.
This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.
The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.
This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.
Before considering an investment in the Fund, you should understand that you could lose money. Certain of the proposed takeover transactions in which the Fund invests may be renegotiated, terminated or involve a longer time frame than originally contemplated, which may negatively impact the Fund’s returns. The Fund’s investment strategy may result in high portfolio turnover, which, in turn, may result in increased transaction costs to the Fund and lower total returns. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks. These risks may be greater for emerging markets. Diversification does not eliminate the risk of experiencing investment losses. Stock prices of mid and small capitalization companies generally are more volatile than those of larger companies and also more vulnerable than those of larger capitalization companies to adverse economic developments. The Fund is non-diversified and is susceptible to greater losses if a single portfolio investment declines than would a diversified fund. The ETF should be considered a speculative investment with a high degree of risk, does not represent a complete investment program and is not suitable for all investors. The Fund may experience a portfolio turnover rate of over 100% that will increase transaction costs and may generate short-term capital gains which are taxable.
The S&P 500 is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States.
The Morningstar Rating™ for funds, or “star rating”, is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The Morningstar Rating does not include any adjustment for sales loads. The top 10% of products in each product category receive five stars, the next 22.5% receive four stars, the next 35% receive three stars, the next 22.5% receive two stars, and the bottom 10% receive one star. The Overall Morningstar Rating™ is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating™ metrics. For the period ended 9/30/19, IQ Merger Arbitrage ETF was rated 5 stars overall, 4 stars for the 3-year period among 113 funds, 5 stars for the 5-year among 84 funds in the Market Neutral ETF category.
“New York Life Investments” is both a service mark, and the common trade name, of the investment advisors affiliated with New York Life Insurance Company. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC and serves as the advisor to the IndexIQ ETFs. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.