Mergers & Acquisitions Surge; M&A Funds Flat

October 27, 2016

There’s been another wave of headline-making mergers and acquisitions this year following a hot year for deals in 2015, the latest of which was the blockbuster $85 billion AT&T-Time Warner deal announced this week.

If you are an ETF investor, does a pickup in M&A activity offer you any investment opportunity?

In theory, yes. There are two ETFs in the market today that look to capitalize specifically on these types of corporate deals through long/short hedge-fundlike portfolios. They are:

But the reality is that the pickup in M&A activity does not necessarily mean an uptick in the performance of these funds.

Consider that, other than the AT&T-Time Warner deal, there have been some pretty notable ones recently, as Bloomberg reported: the British American Tobacco-Reynolds American $58 billion deal; the Qualcomm-NXP Semiconductors $46 billion deal; the Anheuser-Busch InBev bid to buy SABMiller for $100 billion; and talks of a “possible” CBS-Viacom $30 billion deal.

And yet, here’s how these two ETFs have performed relative to the SPDR S&P 500 (SPY) this year—they have practically not gone anywhere: 

Chart courtesy of


Flood Of Deals Don’t Boost Performance

“Both ETFs seek to benefit from a merger arbitrage situation, where a stock will not trade as high as the terms of the deal, on risks the deal may not close as expected,” said Todd Rosenbluth, head of ETF research at S&P Global. “While M&A activity has picked up recently, these ETFs have lagged the S&P 500 index, as their performance is less tied to the traditional catalysts for U.S. equities.”

In the case of the AT&T bid to acquire Time Warner, Time Warner stock traded at a “discount to the deal’s value” because investors aren’t sure this deal will actually close, Rosenbluth notes.

This is where merger arbitrage opportunity lies, but also the challenge. It’s not easy to predict where the next big deal is going to happen, and when the news is made public, the potential to capture outsized premiums tends to diminish.


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