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
exchange-traded fund (
) 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
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
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.
Editor: Market Advisor, The ETF Authority
Disclosure: Nathan Slaughter does not own shares of any security
mentioned in this article.
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