M&A: A decade of deals

Dec 2nd, 2019 | By | Category: Alternatives / Multi-Asset

By Salvatore J. Bruno, Chief Investment Officer, IndexIQ.

Merger Arbitrage ETFs

M&A: A decade of deals

The past decade has been one of the most robust in the history of mergers & acquisitions, with thousands of transactions encompassing trillions of dollars.

While I would love to say we saw all of this coming at the time, we had no way of knowing just what sort of decade we were about to embark upon when we brought the IQ Merger Arbitrage ETF (MNA US) to market on November 17, 2009, but planned or not, the timing has certainly been fortuitous.

MNA is designed to provide investors with a highly liquid, low-cost way to invest in announced mergers and acquisitions. The goal is to benefit from the pricing inefficiencies that often occur when a deal target trades at a discount to the announced acquisition price, with the “spread” expected to tighten as the deal moves forward to the closing date. The strategy is designed to capture this price difference, and it’s incredibly exciting to now have ten years of live track record to point to when we discuss this approach and what it can do for a portfolio.

MNA was something of a novelty at first. There were mutual funds that did something similar, but no merger arbitrage ETFs at that point, and certainly nothing that was delivering this type of exposure at so competitive a fee level.

As with the IQ Hedge Multi-Strategy Tracker ETF (QAI US), the initial phase of the fund’s growth was slow, but over time, as investors came to understand just what it was designed to do, the fund has grown to nearly $900 million in assets as of November 17, 2019. MNA had also earned a 5-star overall Morningstar rating as of September 30, 2019 from among 113 US Market Neutral Funds, which is yet another testament to MNA’s differentiated approach to identifying merger arb opportunities.

There are two main factors that determine returns for a merger arb strategy: deal premiums and completion rates. These can vary but have generally been relatively consistent over time. For their part, completion rates generally are very high. They can go through periods where regulatory scrutiny can make for a more difficult environment, but they tend not to vary based on market conditions, providing for meaningful diversification for an equity-based portfolio.

Deal flows do tend to follow the performance of the S&P 500, according to our research. But while a rising market correlates with more deals, there are other factors that drive M&A. Industry consolidation, global expansion, and the availability of massive amounts of private capital are important as well. Obviously, those have been some of the defining characteristics of the past decade and won’t last forever. However, by applying its rules-based process, MNA seeks to be well-positioned to provide and competitive returns through varying market environments.


IQ Merger Arbitrage ETF (MNA US)

– Tracks the IQ Merger Arbitrage Index.

– Provides returns similar to those
attributable to hedge funds pursuing
merger arbitrage strategies.

– Comes with an expense ratio of 0.77%
and AUM of $960 million.

So far, it has been the financial advisor community that has gravitated to MNA, looking to manage volatility and add uncorrelated returns to their clients’ portfolios. Advisors will always remain a key constituency for us and we are very excited to continue to tell the MNA story to more advisors as the fund moves into its second decade. Just as exciting is the institutional interest level around liquid alternative ETFs, like MNA, that appears poised to take off. A recent study that IndexIQ commissioned with Greenwich Associates showed that, among other major takeaways, institutional investments in liquid alternative ETFs will more than double over the next 12 months.

A decade of deal-making, a decade of innovation in ETFs, and an eye on the future, helping all types of investors better understand just what MNA and other liquid alternative ETFs can do for their portfolios… it’s been quite a ten-year run, and we’re excited about what is still to come!

(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)

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