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Merger & Acquisition ETFs: Will 2016 Replicate 2015?

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Merger and acquisition (M&A) activities across a number of sectors are going through the roof this year. Low interest rates, which may now last only a few days, led the companies to make the most of the easy money era in the U.S. Low interest rates make borrowing cheaper and in turn put less stress on companies' balance sheets, post acquisition.

So far, 2015 has been a record year for the merger and acquisition activities, with November recording the highest transaction value ever globally. The value was $606.6 billion, up 7% month on month, per Dealogic .

US-based M&A volume accomplished $2 trillion for the first time. Not only in the U.S., the Asia Pacific region has seen M&A volume worth $1.05 trillion so far in 2015, up 61% from the comparable YTD last year, per Dealogic. This marked the region's first attempt to cross the $1 trillion level. China topped the Asia

Pacific M&A segment with deals worth $497 billion, up 69% year over year.

Europe also fetched M&A volume of over $1 trillion for the first time in seven years. Volume has touched $1.03 trillion so far in 2015, up 17% from the same frame in 2014. Cross-border deals grew 49% by value year over year, as noted by Dealogic.

Notably, tax inversion is among a few causes what spurred management to sign a cross-border deal. Through this method, U.S. corpoartes intend to shift their headquarters to foreign lands to evade higher American taxes while continuing operations in the home turf.

As per Wall Street Journal , global mergers and acquisitions are already at an all-time high of $4.304 trillion so far in 2015, surpassing the previous record of $4.296 trillion in 2007, while nearly half a month is still at hand. Dealogic estimates the year to end with $4.7 trillion of mergers, if the pace is maintained.

The year also made history with the number of big-ticket deals. As many as 19 U.S. deals were the size of $10 billion and above. In terms of sectors, healthcare led the way in the global M&A space followed by semiconductors.

Some Heavy Deals of 2015

The largest and hottest deal was American pharmaceutical giant Pfizer's ( PFE ) $160 billion acquisition of Allergen (read: Pfizer in Talks to Buy Allergan: Prescribed ETFs ).

Some other hot deals announced in 2015 (as listed by the street.com) were the H.J. Heinz and Kraft Foods Group deal worth $45.44 billion, Avago Technologies' ( AVGO ) intent to buy Broadcom ( BRCM ) for $36.57 billion, AbbVie's ( ABBV ) $20.99 billion acquisition of cancer drug maker Pharmacyclics ( PCYC ), Pfizer 's plan to acquire Hospira (HSP) for $17.15 billon and the Netherlands-based NXP Semiconductors' (NXPI) intent to buy Freescale Semiconductor ( FSL ) for $16.67 billion.

What About 2016?

Per CNBC , the solid momentum in mergers and acquisitions will continue in 2016 as well. We believe that the momentum should stay stronger in foreign lands, especially in the European region where ECB's QE measure is full-blown and interest rates are deep into the negative territory. A flurry of cheap money should propel M&A activities in European nations.

However, several billion-dollar deals announced in 2015 are awaiting regulatory approvals. So some industry experts are apprehending that the deal-making euphoria will cool down in 2016, especially after the U.S. economy sees the first rate hike in a decade.

How to Tap?

Investors could easily take advantage of this surge in deals by employing the merger arbitrage strategy in their portfolio. This strategy looks to tap the price differential (or spread) between the stock price of the target company after the public announcement of its proposed acquisition and the price offered by the acquirer to pay for the stock of the target company.

This is especially true given that investors should go long on the target or the acquired company and short on the acquiring company. When the deal is completed, shares of the target company will increase to the full deal price (in some cases slightly below the deal price), giving investors a nice profit (see: all Hedge Fund ETFs here ).

Below, we have highlighted three merger arbitrage ETFs to ride out the surge from 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 while at the same time provides short exposure to global equities as a partial equity market hedge. This is done by tracking the IQ Merger Arbitrage Index (read: Invest Like Top Hedge Funds with This Outperforming ETF ).

The product has amassed $114.6 million in its asset base and trades in average volume of about 55,000 shares a day. Costs come in at 75 basis points a year. The ETF has added about 0.04% year to date (as of December 14, 2015).

ProShares Merger ETF ( MRGR )

This product follows the S&P Merger Arbitrage Index, which is a benchmark that holds up publicly announced deals within developed market countries. From a sector perspective, financials takes the biggest spot while information and technology consumer discretionary round out the top three. The ETF has been able to manage assets worth $7.2 million while it sees light volume of just 5,000 shares a day. MRGR is off 0.6% so far this year (as of December 14, 2015).

Credit Suisse Merger Arbitrage Index ETN ( CSMA )

This is an ETN option tracking the Credit Suisse Merger Arbitrage Liquid Index. The benchmark has several dozen companies, focusing on liquid firms that see positive acquisition premium which is an offer for substantially all shares outstanding of the target. The note targets deals within the United States, Canada and Western Europe. The product has $5.4 million in AUM and 5,000 shares in average trading volume while expense ratio comes in at 0.55%. The fund is also down 0.6% this year.

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IQ-MERGER ARB (MNA): ETF Research Reports

PRO-MERGER (MRGR): ETF Research Reports

CS-MRGR ARB IDX (CSMA): ETF Research Reports

PFIZER INC (PFE): Free Stock Analysis Report

AVAGO TECHNOLOG (AVGO): Free Stock Analysis Report

BROADCOM CORP-A (BRCM): Free Stock Analysis Report

ABBVIE INC (ABBV): Free Stock Analysis Report

NXP SEMICONDUCT (NXPI): Free Stock Analysis Report

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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.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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