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Profit From Record Q1 M&A With These ETFs

By Zacks Investment ResearchStock MarketsApr 09, 2018 09:55PM ET
Profit From Record Q1 M&A With These ETFs
By Zacks Investment Research   |  Apr 09, 2018 09:55PM ET
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Merger and acquisition activities across the globe picked up rapidly in the first quarter thanks to U.S. tax reform and faster economic growth in Europe.

Per the preliminary Thomson Reuters data, global mergers and acquisitions had their strongest start ever totaling $1.2 trillion in the first quarter of 2018. This is up 67% over the past year and marks the fourth quarter that has surpassed $1 trillion over the past three years. United States M&A volumes climbed 67% while Europe volumes doubled. Meanwhile, Asia saw an 11% increase. However, the number of deals dropped 10% year over year to 10,338.

According to a report by research firm Mergermarket, M&A activity across the world has hit a 17-year-high record in the first quarter with 3,774 deals globally, totaling $890.7 billion. This was the strongest start to the year since 2001 and represents an 18% year-over-year increase in value.

The healthcare space has so far been at the forefront as Amazon’s move into the pharmaceutical sphere has spurred the major pharmacy retailers to consolidate. With regard to this, U.S. health insurer Cigna (NYSE:CI) will acquire the largest pharmacy benefit manager Express Scripts Holding (NASDAQ:ESRX) for $67 billion. The deal is expected to close by the end of this year. In another deal, the drug chain and a pharmacy giant CVS Health Corp (NYSE:CVS) is also in a process of acquiring the nation's third-largest health insurer Aetna (NYSE:AET) for $69 billion. The deal is expected to close in the second half of the year (read: Cigna to Buy Express Scripts: Healthcare ETFs in Focus).

Another large agreement is German utility EON SE’s $38.5 billion deal to acquire RWE AG’s renewable energy business Innogy SE.

The boom in M&A is likely to continue given an accelerating economy, still-low interest rates, and tax reform, which allows companies to bring offshore cash back home. Potential cost savings through mergers are further fueling the urge to merge in the current ultra-competitive environment.

How to Tap?

Investors could easily take advantage of this surge in deals by employing the merger arbitrage strategy in their portfolio. This strategy looks to tap the price differential (or spread) between the stock price of the target company after the public announcement of its proposed acquisition and the price offered by the acquirer to pay for the stock of the target company.

This is especially true given that investors should go long on the target or the acquired company and short on the acquiring company. When the deal is completed, shares of the target company will increase to the full deal price (in some cases slightly below the deal price), giving investors a nice profit.

Below, we have highlighted three merger ETFs to ride out the surge from the increasing M&A deals. Any of these could make compelling options for investors seeking to implement this low correlation strategy to their portfolio:

IQ Merger Arbitrage ETF MNA

This fund offers capital appreciation by investing in global companies for which there has been a public announcement of a takeover by an acquirer while at the same time provides short exposure to global equities as a partial equity market hedge. This is done by tracking the IQ Merger Arbitrage Index. The fund has 44 holdings in its basket with the largest allocation to Blue Buffalo Pet Products (NASDAQ:BUFF) and Rockwell Collins (NYSE:COL) on the long side. These two firms combined to make up for 17.5% share. The product has amassed $503.7 million in its asset base and trades in average volume of around 119,000 shares a day. It charges 77 bps in annual fees. The ETF has lost about 2.3% year to date (see: all the Hedge Funds ETFs here).

ProShares Merger ETF MRGR

This product provides exposure to a global merger arbitrage strategy, which seeks to capture the spread between the price at which the stock of a company (a target) trades after a proposed acquisition of such target is announced and the value (cash plus stock) that the acquiring company has proposed to pay for the stock of the target (a spread). This can be easily done by the S&P Merger Arbitrage Index. The fund holds a well-diversified portfolio of 33 stocks. Technology, industrials, healthcare and financials are the top three sectors. The ETF has been able to manage assets worth $4.4 million while it sees light volume of just 1,000 shares a day.

Bottom Line

While investors could capitalize on merger arbitrage by trading in a particular target company stock, the ETFs provide diversified exposure in the basket form with lower risk. Further, these could be excellent choices for investors in the rocky market due to their low correlation with the overall market (read: Trade Tensions or Not, Stay Safe with These ETFs).

This is because companies in merger and acquisition deals generally move independently, ignoring all other issues that influence the movement of other stocks. As a result, investors could definitely focus on these products for relatively higher returns in any type of market.

Want key ETF info delivered straight to your inbox?

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Blue Buffalo Pet Products, Inc. (BUFF): Free Stock Analysis Report

Rockwell Collins, Inc. (COL): Free Stock Analysis Report

IQ-MERGER ARB (MNA): ETF Research Reports

Cigna Corporation (CI): Free Stock Analysis Report

Aetna Inc. (AET): Free Stock Analysis Report

CVS Health Corporation (CVS): Free Stock Analysis Report

Express Scripts Holding Company (ESRX): Free Stock Analysis Report

PRO-MERGER (MRGR): ETF Research Reports

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Profit From Record Q1 M&A With These ETFs

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Profit From Record Q1 M&A With These ETFs

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