Merger and acquisition activities across the globe have been ramping up this year. Around $2.6 trillion in deals have been cracked globally through July, up 43% year over year, per Dealogic. Deal volume in the United States rose about 47%, as quoted on the Wall Street Journal. If the momentum is maintained, 2018 could approach or even surpass the record $4.38 trillion in global deals announced 11 years ago (read: M&A Hits Record in 1H: Ride High With These ETFs ).
Investors should note that 2018 can easily be credited to rising rate concerns and trade war worries. While trade war tensions are a negative for the merger and acquisition space, the Wall Street Journal noted that "historically [M&A activities] have performed well when M&A activity is strong and interest rates are rising. Rising rates can lead to bigger spreads between market prices and deal prices, potentially increasing arbitragers' returns."
During 2004-2007, the Fed raised the rates from 1% to 5.25% and Merger Fund returned 5% annually , beating the average intermediate government fund by a wide margin, per thestreet.com. Yet another source had confirmed that M&A strategies have actually done well during periods of rising financing costs and substantiated with the chart below.
Merger arbitrage strategies look to profit from the price difference between a stock's price after the public announcement of a merger and the completion of the deal. The asset class is an excellent choice for investors in a volatile market due to their low correlation with market conditions. This is a positive for today's market environment given stocks at risks due to trade war worries and bonds struggling thanks to rising rate concerns.
This year, merger-arbitrage mutual funds and ETFs have seen inflows close to $1.64 billion through June, according to Morningstar Inc. As the year is all about rising rates, the M&A category probably "has returned negative 0.37% through July, versus a negative 1.59% return for the Bloomberg Barclays US Aggregate Bond index," per an article published on Wall Street Journal.
Below, we have highlighted two merger ETFs to ride out the increasing M&A deals. Any of these could make compelling options for investors seeking to implement this low correlation strategy to their portfolio:
IQ Merger Arbitrage ETF MNA
This fund offers capital appreciation by investing in global companies for which there has been a public announcement of a takeover by an acquirer while at the same time providing short exposure to global equities as a partial equity market hedge. This is done by tracking the IQ Merger Arbitrage Index (see: all the Hedge Funds ETFs here ).
ProShares Merger ETF MRGR
The underlying S&P Merger Arbitrage Index provides exposure to a global merger arbitrage strategy, which looks to replicate the spread between the price at which the stock of a company trades after a proposed acquisition of such target is announced and the value that the acquiring company has proposed to pay for the stock of the target. The index takes long positions in target securities.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.