Back in August 2009, Walt Disney Co. (
) unveiled plans to acquire Marvel Entertainment (
) in a $4 billion cash/stock transaction. The deal valued Marvel at
approximately $50 per share, a +30% premium to the $38.65 it
fetched before the deal was announced.
Marvel shareholders were treated to an instant windfall as the
stock shot up on the news. The shares settled at $48.37 when
trading closed the next day -- a slight discount to the proposed
This happens quite often. There would be little sense in paying
$50 for a stock that somebody else is planning to buy from you for
$50 (unless you believe a higher bid is forthcoming). Plus, there's
always the possibility that the deal might unravel -- regulatory
concerns and shareholder backlash are two of the potential
obstacles that can derail a takeover.
But in most cases, the deal is closed without a hitch -- so
anyone that bought at $48 and change stands to make a quick profit
once everything is finalized. This type of nickel and dime game is
called arbitrage, and it happens practically every day in one form
or another on Wall Street.
Arbitrageurs love these low-risk/low-reward opportunities.
They'll take a free $1 here or $2 there all day long. If this
concept sounds appealing, then you'll probably be interested in
IndexIQ's Merger Arbitrage ETF (
-- it's the first ETF designed to profit from merger &
Launched in October 2009, the appropriately named MNA is an ETF
that seeks to profit from price differentials like we saw with
Marvel. In fact, Marvel was one of the fund's holdings, along with
a couple dozen other companies that have found themselves in the
cross-hairs of larger firms hunting for acquisition targets.
IndexIQ is relatively new on the scene, but it is tackling a
niche that has been previously off-limits to most of us:
Alternative investments. These strategic investments are employed
by savvy hedge fund managers and can be highly profitable.
It's true that hedge funds use tactics that can backfire at
times. And they have certainly received plenty of bad press. But
make no mistake: they can also be extremely profitable. Why else
would savvy billionaires write them such large checks?
Luckily, MNA is cut from a different cloth. This ETF isn't
shooting for extraordinary gains, but rather easy ones. And we're
not talking about potential takeover targets either. This fund
holds confirmed deals that are just waiting for the "i's" to be
dotted and the "t's" to be crossed. Unless something unexpected
happens to sidetrack the deal, these opportunities almost always
lead to sure profits in a short period of time.
The fund is a third-generation "rules-based" index --
essentially a hybrid between passive and active management. The
index is reconstituted and rebalanced every 30 days to keep pace
with the latest deals. Right now, technology, business services and
energy make up the largest segments of the portfolio -- but those
weightings will change with the M&A winds.
The portfolio also has some short bets against major global
indexes to hedge against market declines. Those positions, along
with the fact that takeover targets march to the beat of their own
drum, should limit downside exposure.
This new fund doesn't have much of a track record, but
back-tested data shows the underlying index has outperformed the
MSCI World Index since inception in October 2007 -- with less than
half the annualized volatility.
I first spotlighted this fund in December 2009 for readers of my
A few points I shared with my readers:
- I think it's a safe bet the portfolio will lag a bit in
runaway bull markets, considering the stock prices of the
underlying holdings are capped by the terms of the takeover deals
involved. But it should perform well under most other conditions,
particularly down markets.
- I expect to see high portfolio turnover as old deals are
closed and new ones announced, so tax efficiency isn't a big
selling point with this fund. However, low volatility is always
- I gave the fund relatively strong marks in the valuation
department, considering every stock in the portfolio is trading
for less than what acquirers are willing to pay.
More wheeling and dealing means more potential arbitrage
opportunities. On that front, shareholders have reason to be
When the credit markets froze last year, M&A activity dried
up. But cash is more plentiful now -- S&P 500 companies have
more than $700 billion sitting on the books. And there are still
plenty of bargains to be had despite rising stock prices. That
combination will likely cause leveraged buyouts and other deals to
begin heating up.
I'll be monitoring MNA for my closed-end fund rival
Gabelli Global Deal (
. But for now, this new fund is worth looking into.
All in all, the fund looks to be an intriguing option for
investors wanting to pocket an easy +6% to +8% return in an average
year with little downside exposure.
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