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Can M&A ETFs Surge in 2H?

Zacks Equity Research

Merger and acquisition (M&A) activities across a number of sectors were rampant last year with companies spending about $3.8 trillion. But M&Aremains low this year contrary to analysts’ expectation.

As per Dealogic, so far this year, global M&A is down 20% with activities in the U.S. declining 26%. Equity market turmoil thanks to China, oil- related woes in the first quarter of 2016 and Brexit blues in the second kept the overall market edgy and weighed on corporate activities.

Especially, Brexit played a key role in the likely downturn in the M&A industry as “the smaller firms with large exposure to the U.K. will still be looking at what happens in the negotiations [with the remaining members of the EU]," as per a senior relationship manager at Dealogic. But the effect should not be too much as “more than $1 trillion will likely be shaved from global mergers and acquisitions only in a worst-case scenario” as estimated by the Baker & McKenzie study.

All is Not Lost

Investors should also note that, in this downtrend, the Middle East/Africa, Japan, Latin America and Canada have witnessed a surge in M&A activities this year. Also, in the U.S., things may turn around (read: What Lies Ahead for M&A ETF?).

This is especially true as companies are finding it less exciting to go public as offering an IPO is a lot costlier than dealing with debt amid extremely low interest rate levels prevailing in most developed economies. Regulatory issues have also become stringent these days with financial firms involving themselves in IPO proceedings.

According to J.P. Morgan Asset Management,all these have instigated more companies to offload their divisions and sell the entire entity, driving up M&A activities.

Also, there is a view which indicates that persistently low oil price will force some beleaguered oil companies to put themselves up for sale to escape bankruptcy. As per analysts, “the number of M&A transactions may go up this year but the value will probably decline without any big deals.”

Tech is the Star Sector

Things are shoring up in the tech space with deals topping other sectors both in 2015 and 2016. In fact, the dollar value of tech deals is higher this year. A paradigm shift in the tech space from traditional to cloud-based computing has forced companies like Oracle and IBM to go for acquisitions and fill the void in their offerings, as per the source (read: Time to Buy These Tech ETFs?)

Some of these are deals between Microsoft and LinkedIn, Analog Devices and Linear Technology, Verizon and Yahoo deal, and Salesforce.com and Quip. Also, with Apple agreeing to buy Turi, Uber selling its Chinese business unit to Didi and Oracle planning to buy NetSuite, the tech space has been rather eventful.

How to Play?

Investors can easily take advantage of the merger arbitrage strategy. 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 closed, 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).

Here are two merger arbitrage ETFs, any of which could make compelling options for investors seeking to play this area. These are IQ Merger Arbitrage ETF MNA and ProShares Merger ETF MRGR (read: Follow Warren Buffet with These ETF Strategies).

Also, the uptick in mergers and acquisitions, in some cases, is triggered by private equity firms. This gives investors an option to ride on such activities by investing in private equity ETFs as well.

PowerShares Global Listed Private Equity Portfolio ETFPSP and Global Listed Private Equity ETF PEX are two private equity funds that may be taken into consideration.

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