After a roughly six month break, it appears as though ProShares is back launching new products once more with the debut of its Merger ETF (MRGRF). This product marks the 13th launch for the company this year and just the fourth non leveraged/inverse fund from the Maryland-based firm in the 2012 time period.
Still, even though the fund does not utilize leverage, it is can still be classified as a ‘long-short’ product due to its focus on a merger arbitrage strategy. This technique looks to go long in firms that have announced that they are a target for a takeover, while simultaneously going short in the acquiring firms.
This approach looks to profit off of the spread between the price that that target firm trades at after a deal has been proposed, and the actual deal price that has been offered to the target’s management and shareholders. This is a relatively riskless way of obtaining a small profit, while it can also provide investors with some uncorrelated returns, a great feature in today’s market environment (read Two ETFs for the Muddle Through Economy).
The new MRGR ETF looks to accomplish this task by following the S&P Merger Arbitrage Index which is a benchmark that holds up to 40 publically announced mergers or acquisitions in developed countries around the globe. Additionally, the deals have to be at least half a billion dollars, and liquidity must reach a level of an average daily trading value of two million over the trailing three month period.
Investors should also note that the benchmark only includes deals that have an implied deal price at least 2% above the price of the stock immediately following the deal announcement. The index also includes a cash component of three-month T-bills, so it does look to earn a small level of interest from this as well (see Time for a Merger Arbitrage ETF?).
"The goal of MRGR is to produce consistent, positive returns under virtually any market conditions," said Michael L. Sapir, Chairman and CEO of ProShare Advisors LLC, ProShares' investment advisor in a press release. "We are pleased to offer access to a true merger arbitrage strategy delivered for the first time with the cost efficiency, transparency and liquidity of an ETF."
MRGR in Focus
The ETF looks to charge investors 75 basis points a year for this exposure, putting at the high end of ‘regular’ ETFs but well in line for a product that utilizes some short exposure in its approach. According to the ProShares site, consumer, industrial, and energy firms comprise the bulk of the assets in the ETF, leaving little for utilities, communication, and technology firms.
Market cap exposure is tilted towards large caps, although overall the product has a small and mid cap focus as securities that are less than $5 billion in AUM account for nearly 40% of the total. Meanwhile from a national look, American stocks comprise the majority, but Canadian (19.7%), Asia—besides Japan—(19.7%), and Europe—outside the UK-- (6.3%), account for nearly all the rest of the assets.
While this new product looks to give more access to the world of merger arbitrage, we should point out that there is already a merger arbitrage fund on the market. This product, from IndexIQ, trades under the symbol of MNA and has been tradable since November of 2009.
However, this ETF has failed to garner a significant amount of assets in its three years on the market as the fund has just under $15 million in AUM and volume below 10,000 shares a day. The fund also has a significant cash component which has helped to underperform broad markets in 2012, but also remain incredibly stable and very capable of beating out the S&P 500 during bear market periods (see Three Excellent Dividend ETFs for Safety and Income).
Still, the fact that the product hasn’t seen much in inflows over the past few years may suggest that there isn’t much ETF investor interest in the space. Since fees are pretty comparable among MNA and the newly launched MRGR, the battle for any new AUM in the space will come down to performance and holdings.
Should MRGR be able to outperform, it may be able to make a name for itself in the space, but it remains to be seen just how much in assets that might mean for merger arbitrage ETFs, especially if the economy continues to improve and investors look to long only products instead of ‘hedged’ ones.
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