Mergers and acquisitions present an opportunity for some investors to capitalize on expanding businesses. With exchange traded funds, investors now have more options to capture the M&A activity.
ProShares recently launched the ProShares Merger ETF (BATS:MRGR). The ETF tries to reflect the performance of the S&P Merger Arbitrage Index, which capitalizes on the spread between stock prices of target company after a M&A deal is proposed compared to the offering company, according to a filing.
“The goal of MRGR is to produce consistent, positive returns under virtually any market conditions,” Michael L. Sapir, Chairman and CEO of ProShare Advisors LLC, said in a press release.
The spread occurs because of the uncertainty surrounding the deal, such as risks with the transaction or the time it will take to finish. For those deals that fall through, the price of the target company will typically fall back to pre-announcement levels and result in significant losses.
MRGR holds up to 40 publicly announced deals within developed markets. It will take long positions in the shares of the target companies while shorting shares of the acquiring company when the deal involves an exchange of the acquiring firm’s stock. As of September 30, the ETF had 113.6% in long positions and -19.6% in shorts, with a 6.1% cash holding.
Regional allocations include U.S. 51.8%, Canada 19.7%, Asia ex-Japan 17.5%, Europe ex-U.K. 6.3%, Australia 3.8% and Japan 0.9%.
Sector allocations include consumer staples 32.4% long/-20% short, industrial 22.0% long/-35.4% short, energy 21.4% long/-15.8% short, financial 7.2% long/-28.9 short, consumer discretionary 6.9%, basic materials 4.6%, tech 3.4%, communications 1.5% and utilities 0.7%.
The new M&A ETF will be against the IQ ARB Merger Arbitrage ETF (MNA) , which invests in global companies that have announced a takeover and shorts global equities as a partial equity hedge.
Additionally, the exchange traded note option, Credit Suisse Merger Arbitrage Liquid Index (CSMA) , also provides exposure to the merger arbitrage investment strategy by taking long and short positions in announced deals within the U.S., Canada and Western Europe.
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Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.