IndexIQ Launches Play On M&A

November 17, 2009

 

IndexIQ launched today the first exchange-traded fund to invest in global companies that are the targets of a takeover.

M&A products are not new to investors, but IndexIQ’s new offering is the first play on that space in an ETF structure.

The IQ ARB Merger Arbitrage ETF (NYSEArca: MNA) will track the IQ ARB Merger Arbitrage Index, which has seen year-to-date returns of some 19.5 percent, just slightly shy of MSCI World Index’s 23.3 percent gains in the period.

MNA will follow two angles of investment. First, it will buy stocks of companies for which there’s been a public announcement of a takeover. Second, it will short out its broad market exposure using futures, in an attempt to capture a "pure" M&A-related return.

The fund is a unique entry into the "hedge fund replication market," and a break from IndexIQ's other funds, in that it actually pursues the same strategy as a classic M&A hedge fund rather than attempting to replicate the returns of a hedge fund strategy synthetically. It's a "beta hedge fund" in the classic sense of the phrase.

“There has been a pickup in mergers and acquisitions activity on a global basis,” Anthony Davidow, IndexIQ executive vice president and head of distribution, said. According to Davidow, the market is very conducive right now to a product such as MNA, especially given low interest-rate levels, low valuations and widespread opportunities for companies to expand their global footprint.

Deals are evaluated on the probability that they will go through successfully in order to be included in the portfolio. That's done by looking at the current price of a stock, its day-before-the-takeover-announcement price and its target price.

Though deals selected are not chosen by region or by sector, MNA tends to be tilted toward U.S.-based companies. That’s due to the size of the impending deals as compared with other acquisitions taking place internationally, Salvatore Bruno, IndexIQ chief investment officer, said. All together, the fund holds about 40 names.

MNA Country Breakdown:

  • United States: 76.98%
  • Australia: 8.34%
  • Canada: 3.94%
  • United Kingdom: 1.04%
  • Japan: 0.80%

From an industry sector perspective, health care companies are carrying the most weight in the portfolio, with more than a 22 percent share, followed by consumer staples. But MNA also carries a hefty weight in cash, though over time, that cash position should be less than 10 percent.

MNA Sector Breakdown:

  • Health Care: 22.70%
  • Cash: 19.49%
  • Consumer Staples: 16.49%
  • Information Technology: 9.03%
  • Equity Market Hedge: 8.89%
  • Consumer Discretionary: 6.05%
  • Energy: 6.02%
  • Materials: 4.17%
  • Telecommunication Services: 3.70%
  • Financials: 2.70%
  • Utilities: 0.74

The portfolio is rebalanced monthly. MNA comes with an expense ratio of 75 basis points.

You can read more information about the fund here.

 

 

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