With markets facing some severe weakness as of late, many
investors have looked to uncorrelated plays as solid investments.
Unfortunately, many of these typical investments-such as bonds,
gold, and low volatility stocks, have not held up well either,
and have in many cases underperformed broad markets.
This is forcing many to look at new avenues for funds that can
still hold up in uncertain economic environments. One such space
that you may not have considered yet but that could certainly fit
the bill is the merger arbitrage space.
What is Merger Arbitrage?
This strategy looks to focus on companies that have been
announced as takeover targets, as well as the companies that are
doing the acquiring. Generally speaking, when such a deal is made
public, the firm being acquired will see its share price rise
close to-but not all the way up to-the acquisition price.
The difference between what the target company trades at and
the deal price is there due to some uncertainty about the deal
going through. This gap presents some investors with an
interesting opportunity though, as a potential trading strategy
can be applied to this phenomenon.
Investors can go long in the to-be acquired company, and then
short the acquiring firm. Then, when the deal goes through, the
acquired company's stock should increase to the full deal price,
giving investors a nice profit.
While this approach may not exactly be 'arbitrage' in the
traditional sense, as there is definitely a risk of loss if the
deal doesn't go through, it is generally speaking a lower risk
strategy, especially when applied across a number of companies at
the same time (see
Two ETFs for the Muddle Through Economy
This approach could be in focus now more than ever thanks to
the low correlation that this technique has with overall markets.
Merger and acquisition deal companies usually move relatively
independent of other stocks, as being taken over generally trumps
all other issues (see
Food ETFs in Focus on Deal Wave
Plus, there have been a ton of announced deals lately, so
there are a number of potential companies to apply this technique
towards. This makes a basket, diversified approach very easy to
accomplish, allowing investors to spread the risk around a number
of mergers and acquisitions instead of just focusing on one or
How to play with
Fortunately for investors seeking to apply this approach to
their portfolios, there are a number of merger arbitrage ETFs on
the market. This will allow investors to avoid the worries of
shorting stocks, while at the same time quickly and cheaply
establishing basket exposure across a host of firms in various
Time for a Merger Arbitrage ETF?
Below, we highlight three merger arbitrage ETFs currently
trading in the market, any of which could make for compelling
options for investors seeking to implement this low correlated
strategy to their portfolios during this rocky market
IQ Merger Arbitrage ETF (
The first ETF in this space tracks the IQ Merger Arbitrage
Index, a broad benchmark of companies for which there has been a
public announcement of a takeover. The goal of the ETF is to
generate returns that are representative of global merger
arbitrage activity, while also including short exposure to global
equities as a type of market hedge.
According to the most recent fact sheet, the fund has roughly
35 holdings in its basket, while top holdings appear to be in
Life Technologies, NYSE Euronext, and Dell. Costs come in at 76
basis points a year, while the index has a decent dividend yield
of roughly 1.5%.
The fund has seen a decent performance during this latest bout
of instability, as the ETF has added about 2.5% in the past
month. This compares favorably to the S&P 500's 22 basis
point loss during the same time frame, suggesting that MNA has
held up quite well.
ProShares Merger ETF (
Another option for investors in this corner of the market is
MRGR, an ETF from ProShares that tracks the S&P Merger
Arbitrage Index. This benchmark looks to hold up to 40 publicly
announced deals within developed market countries, keeping about
3% in each company.
Top holdings in this fund include NYX, HCBK, and ELN, while
the market cap level skews towards small and micro cap
securities. From a sector perspective, consumer discretionary
firms take the biggest spot, followed by technology and
financials to round out the top three (see
ProShares Launches Merger Arbitrage ETF
This ETF has also outperformed the S&P 500, adding about
1.15% in the past one month time frame. The fund is also barely
cheaper than its MNA counterpart-beating it by one basis
point-though trading volumes are extremely light.
Credit Suisse Merger Arbitrage Index ETN (
For an exchange-traded note approach, investors have CSMA at
their disposal, a product that tracks the Credit Suisse Merger
Arbitrage Liquid Index. This benchmark has several dozen
companies, focusing on liquid firms that see a positive
acquisition premium that is an offer for substantially all shares
outstanding of the target.
Some of the current top holdings include BMC, LIFE, and S on
the long side, while for short exposure, MTB, ODP, and ACT make
up some of the biggest allocations.
This has actually been the best performer of the group, adding
about 3.2% in the past month. However, this product is a bit
pricey with fees coming in over 1% a year in total. Plus volumes
are extremely light here as well, suggesting that it may be a
difficult choice for those seeking to make a quick play on the
space (also read
Three Biggest Mistakes of ETF Investing
(Note that all three have light trading volumes and that bid
ask spreads may be wide at times. As a result, it is important to
use limit orders if you are thinking about trading any of these
This isn't the sexiest strategy out there and it will probably
underperform in bull market environments. However, in sluggish
market conditions or when global fears are elevated, this could
be an uncorrelated way to approach investing.
There will always be mergers and acquisitions, and thus there
will always be 'arbitrage' opportunities on these deals. While
investors can certainly try to do this strategy on their own,
ETFs are clearly more diversified options that could be cheaper
in the long run (thanks to all the trading cost issues being
Want the latest recommendations from Zacks Investment
Research? Today, you can download
7 Best Stocks for the Next 30 Days
Click to get this free report >>
CS-MRGR ARB IDX (CSMA): ETF Research Reports
IQ-MERGER ARB (MNA): ETF Research Reports
PRO-MERGER (MRGR): ETF Research Reports
To read this article on Zacks.com click here.
Want the latest recommendations from Zacks
Investment Research? Today, you can download 7 Best Stocks for
the Next 30 Days. Click to get this free report