Big Deals Not Boosting M&A Funds

May 08, 2014

Despite spate of big deals, ETFs based on mergers and acquisitions reamain flat.

The M&A market is picking up steam in 2014 after a lull the past two years, and a spate of big mergers and acquisitions so far this year has raised investors’ outlook for the U.S. economy, which is still in a slow recovery post-2008.

Indeed, the first quarter of 2014 was strong for U.S. M&A activity. The Wall Street Journal reports that U.S.-based companies so far this year have proposed or agreed to $637.95 billion worth of mergers or acquisitions, citing data from Dealogic.

“To the extent the S&P 500 stays near all-time highs and interest rates stay low, I think there’s plenty more to come,” said Spencer Bogart, an analyst.

Investors looking to get a piece of the M&A action currently have three options, including the $34 million IQ Merger Arbitrage ETF (MNA | D-95), the $51.7 million Credit Suisse Merger Arbitrage Liquid ETN (CSMA | B-94) and the $3.7 million ProShares Merger ETF (MRGR). However, none of the three have seen much of a boost from the string of recent deals.


Chart courtesy of

On the deal front, Bayer AG this week announced that it will acquire the consumer-care business of U.S.-based Merck for $14.2 billion in cash. Last week, Pfizer upped its bid to buy AstraZeneca for close to $106 billion, while GlaxoSmithKline announced it will acquire Novartis AG’s global vaccines business for about $7 billion and sell its oncology business to Novartis for some $16 billion.

In February, Comcast Corp. and Time Warner Cable announced a merger valued at $45 billion, while Facebook snapped up messaging service WhatsApp for a cool $19 billion.

“Much of the spending this year can be attributed to a number of multi-billion dollar deals,” according to a research note from FactSet. “These mega deals continue to be the trend in 2014.”

Credit Suisse’s CSMA tracks an index that takes long positions in firms that are acquisition targets, but only partially offsets this exposure with short stakes in the acquiring firms.

MNA follows a similar strategy, but rather than directly shorting the acquiring name, the fund partially offsets long stakes with broad equity indexes. MNA recently updated its portfolio to include the Pfizer/AstraZeneca deal.

The newest fund in the group, MRGR, which launched in December 2012, tracks an index of developed-market equities involved in merger deals, with long exposure to target firms and short exposure to acquiring firms. MRGR’s portfolio currently has exposure to Time Warner, but doesn’t include the above-mentioned health care companies.

Year-to-date, MRGR is down 1 percent, while CSMA is down about 2 percent and MNA is up more than 3 percent, beating the S&P 500 Index’s gain of 1.8 percent.

It’s worth noting that all three ETFs raise liquidity concerns, a sign that investors either don’t believe in the strategy or that the ETF is the best way to execute the strategy, according to Bogart.

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