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3 ETFs To Profit From The M&A Boom

M&A activity is booming this year as companies rush to beat competitors in the race to become bigger and better. As organic growth has been hard to come by, companies are trying to grow, improve margins and achieve greater synergies by taking over rivals. At current pace, 2015 appears to be on track to be the biggest year ever for M&A. Per Dealogic , US-targeted M&A reached a half-year record high of $1.03 trillion in the first half of this year, with 21 $10 billion plus deals announced so far. Global M&A volume reached $2.19 trillion in 1H 2015 – second-highest half-year volume on record, even though deal activity has remained sluggish in Europe, with weak economic growth and concerns related to political problems in Greece. Healthcare has been the most targeted sector in the US with $293.6 billion in deals – the highest half-year volume in record and up 73% from the same period last year. Technology ranks second, with $143.8 billion in deals – highest since the first half of 2000. Improving economy, ultra-low interest rates, and growing cash piles on companies’ balance sheets are the main reasons for the surging interest in acquisitions. Potential cost savings through mergers are further fueling the urge to merge in the current ultra-competitive environment. Many companies want to stay ahead in the takeover game by bulking up in order to avoid becoming targets of their rivals. As the rate hikes by the Fed are expected to be very gradual and subject to further improvement in the economy, corporate enthusiasm for deals remains high, signaling a strong second half for M&A. Below, we have highlighted three ETFs that are likely to benefit from the continued surge in M&A. Index IQ Merger Arbitrage ETF (NYSEARCA: MNA ) Merger arbitrage strategy basically aims to exploit the spread between target stock’s price after the announcement of the deal and the final takeover price. Due to the risk that an announced deal may not go through for some reason, target usually trades at a lower price until the takeover is complete. Regulatory hurdles often complicate the prospects of execution of deals, leading to the uncertainty. There are many hedge funds that play this strategy. For individual investors, the option is available through ETFs. MNA invests in companies for which takeovers have been announced and goes short on broader global equities index. It charges an annual fee of 0.76%. The product currently holds 31 companies, with Salix Pharma, Hospira and Baker Hughes being the top holdings. Looking at the performance – the product has returned 3.3% this year and 16.8% over the past three years, with very low volatility. Investors should remember that these are “hedged” or somewhat “market-neutral” strategies. Their performance is largely independent of twists and turns in the market. Further since these strategies have low correlations with stocks, they also provide some diversification benefits to the portfolio. While there are a couple more options in the space – (NYSEARCA: CSMA ) and (BATS: MRGR ) – they have failed to take off, with just $5.5 million and $6.3 million in assets respectively, exposing them to closure risk. iShares U.S. Healthcare Providers ETF (NYSEARCA: IHF ) With Aetna’s announcement last week to acquire Humana for about $37 billion, deal frenzy in the healthcare space continues unabated. It’s been a take-over battle between the five largest health insurers – United Heath, Humana, Aetna, Anthem and Cigna – as the Federal Affordable Care Act continues to reshape the healthcare market. Renewed market dynamics are forcing the companies to diversify, cut costs, gain scale and improve technologies. With the trend likely to continue in the coming months, investors should consider investing in IHF, which appears to be the best healthcare ETF to benefit from this trend. This ETF follows the Dow Jones U.S. Select Healthcare Providers Index with exposure to companies that provide health insurance, diagnostics and specialized treatment. The product fund holds 51 securities in its portfolio with United Health, Express Scripts and Cigna being the top 3 holdings. The fund has been able to attract $1040 million in assets so far. It charges 43 bps in annual fees and expenses and has gained almost 20% so far this year. SPDR S&P Semiconductor ETF (NYSEARCA: XSD ) M&A activity has been extremely hot in the Chip industry. With revenue growth slowing down , primarily due to strong US dollar, excessive inventories and the end of a PX cycle upgrade, semiconductor companies are trying to grow, expand into new markets and stay competitive by acquiring smaller players in the industry. Avago Technologies’ $36.6 billion offer for Broadcom is the largest Technology M&A deal announced on record. XSD tracks the S&P Semiconductor Select Industry Index, holding 47 stocks in its basket in almost equal weights. While equal weighting reduces the company specific risks, the product is tilted towards small cap stocks, making it more volatile than broader technology ETFs. It charges 35 bps in fees per year and is up about 6% year-to-date. Original Post

The IQ Merger Arbitrage ETF: A Unique ETF With A Built-In Downside Hedge

Summary I conducted a review of the IQ Merger Arbitrage ETF. I found that the IQ Merger Arbitrage ETF has significantly outperformed its peers because of the underlying strategy the ETF uses. In addition, the IQ Merger Arbitrage ETF has outperformed stocks on bonds during big down days. In this article, I will be reviewing the IQ ARB Merger Arbitrage ETF (NYSEARCA: MNA ) as an option for investors looking for a fund that is not highly correlated with stocks or bonds. I believe MNA is an ETF that investors can hide out in when the market panic sells like this past week with the crisis flavor of the week Greece, Puerto Rico, etc. MNA fits well into most portfolios because of the low correlation it has to stocks and bonds. The table below shows MNA is inversely correlated to the iShares Core Total U.S. Bond Market ETF (NYSEARCA: AGG ) and only has a 36% correlation to the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). With the bond market and the stock market in significant bull markets, there is a real possibility that both stocks and bonds could fall at the same time, which means non-correlated funds have the potential to be an intriguing addition to portfolio for diversification. MNA AGG SPY MNA 1 AGG -0.07 1 SPY 0.36 -0.11 1 Fund Investment Strategy MNA invests in companies that have been publicly announced as acquisition targets and hedges those positions with a broad market short hedge. When a deal is announced, there is a spread between the current trading price and the actual deal price. For example, stock XYZ is acquired for $50/share and after the announcement, XYZ is trading at $49/share. MNA would invest in shares of XYZ and capture the $1 difference between the acquisition price and the current price. As I will detail below in the performance section, MNA has a vastly different return profile than its competitors because it uses a broad market hedge instead of shorting specific stocks, which the competitors for MNA do. This is extremely important given current market conditions, because many companies that are making the acquisitions and thus the companies in the ProShares Merger ETF ( MRGR) and the Credit Suisse Merger Arbitrage Liquid Index ETN ( CSMA) are shorting increasingly along with the acquired company. The following chart shows a real-life example with CSMA having a long position in Time Warner Cable (NYSE: TWC ) and short position in Comcast (NASDAQ: CMCSA ). I assumed that CSMA purchased TWC on the day the deal was announced and showed the performance until April 24th of this year when the deal was called off. As you can see, this was a losing trade for CSMA because Comcast had a better performance than Time Warner Cable, which means that CSMA shorted the better performing company. (click to enlarge) Competition The three main competitors that MNA has are MRGR, CSMA and The Merger Fund (MUTF: MERFX ), which is a mutual fund. Costs: Below is a table, which shows that MNA is only 1 basis point more expensive than MRGR, which is a miniscule difference and is significantly cheaper than CSMA and MERFX. A low expense ratio does not mean that the performance will be better than its more expensive competitors; however, in this case, MNA has significantly outperformed its competitors because of the unique strategy that MNA uses. Expense Ratio MRGR 0.75% MNA 0.76% CSMA 1.05% MERFX 1.27% Performance The following charts show the total return performance of MNA compared to MRGR, CSMA and MERFX, with the charts and data coming from Dividend Channel’s total return calculator . MNA vs. Competitors As you can see in the chart below, MNA has significantly outperformed MRGR since December 2012, which was the start date for MRGR. The performance is not even close, and the funds are going in opposite directions, which shows the strategy MNA uses is superior to MRGR. (click to enlarge) The next chart shows MNA has significantly outperformed CSMA as well since CSMA started trading in October 2010. Up until the start of 2014, MNA and CSMA performed very closely; however, since then, the performance has diverged, because the stocks of the acquiring companies have rose significantly once a merger or acquisition was announced. (click to enlarge) The final chart shows MNA compared to MERFX, which is the widely held $5.3 billion in assets Merger Arbitrage mutual fund. Once again, the same pattern repeated itself with the performance of MNA diverging from the performance of MRFX over the last two years. (click to enlarge) MNA vs. SPY & AGG on worst days Using my ThinkorSwim platform, I looked at the five worst trading days for stocks [SPY] and bonds [AGG] and found that MNA performed well on those days when the broad stock market or bond market was down significantly. As you can see in the table below, the data clearly shows that MNA performs quite well during big down days in the market. SPY MNA AGG MNA 1/15/2015 -1.80% 0.33% 2/6/2015 -0.58% -0.03% 3/6/2015 -1.40% -0.31% 3/2/2015 -0.67% 0.10% 3/10/2015 -1.62% -0.10% 3/6/2015 -0.65% -0.31% 3/25/2015 -1.46% -0.34% 5/11/2015 -0.63% 0.20% 6/29/2015 -2.10% -0.33% 6/22/2015 -0.49% -0.17% Average -1.68% -0.15% Average -0.60% -0.04% Closing Thoughts In closing, I believe MNA is a quality choice for conservative investors who are looking for a non-correlated fund that can be a place to hide out in the event of some foreseen or unforeseen adverse market conditions. MNA is superior to its competitors, because it does not short the stocks of acquiring companies, which has been an excellent strategy in this market, and MNA performs well on days when stocks or bonds are declining significantly. If you are looking for income, MNA is not the fund for you, because MNA only pays an annual dividend if/when they do pay a dividend. Disclaimer: See here Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MNA over the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: I may initiate a position in MNA in the next month or two.