Mergers & Acquisitions Surge; M&A Funds Flat

October 27, 2016

How MNA Works

MNA tracks an index that takes long positions in firms that are acquisition targets, and shorts broad equity indexes to manage downside risk associated with the deals. Any money left over is tied to short-term bonds.

The design is meant to capture any premium associated with the companies being acquired, much like a hedge fund would do.

The long side of the portfolio weights deals based on liquidity—on average dollars traded—of a company. The short side of the portfolio can represent as much as 40% at times. 

One of the main risks associated with this strategy is that a deal can be broken, and when that happens, stock prices of the target companies tend to drop. In the case of MNA, stocks aren’t removed immediately from the portfolio if that happens—they stay on until the next monthly rebalance. That can impact returns.  

Bonds Top Allocation

Right now, the portfolio’s largest single allocation is to short-term bonds in the form of a 19% allocation to the SPDR Barclays 1-3 Month T-Bill (BIL) and a 6.3% allocation to the iShares Short Treasury Bond (SHV)—that’s roughly a quarter of the portfolio. These ETFs are in the black year-to-date, but not by much. They have each returned less than 1% so far in 2016.

Leading individual companies with a 9.6% weighting is LinkedIn, followed by St. Jude Medical and Rackspace—all takeover targets.

On the short side of the portfolio, the largest weighting is to a few sector ETFs. The Healthcare Select Sector SPDR (XLV) and the Energy Select Sector SPDR (XLE) are at a combined weighting of about -10%. XLV’s share price is down this year, but XLE has rallied more than 16%.

MRGR Similar Build   

MRGR, launched in 2012, goes head to head with MNA and is built in much the same way. The fund is vastly smaller, however, having gathered only about $5.5 million in assets in four years.  

MRGR longs stocks of companies that are the targets of acquisition, and it shorts the acquiring firms, with the goal of capturing the spread between the two. The fund also has a currency-hedge component given that it’s global in scope.

The underlying index in this strategy usually comprises about 40 announced deals. Among the fund’s largest single company holdings right now are names such as Yadkin Financial, Starz and Valspar Corp.

Perhaps due to a positive stock market, or to low interest rates, or to companies’ need to grow through acquisition, or to all of the above, M&A deals continue to pop up as the year-end nears. Some even say that the massive AT&T/Time Warner deal “could potentially trigger another M&A wave due to the strategic merits of vertical integration,” according to Rosenbluth.

These funds offer a direct vector for ETF investors to tap into the deals themselves, but it’s important to remember that more and bigger M&A deals don’t necessarily translate into more and bigger returns in these hedge-fundlike ETFs.

Contact Cinthia Murphy at [email protected]


Find your next ETF

Reset All