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There's an ETF for That? Investing in IPOs, Mergers, and Spin-Offs

Published 04/10/2024, 10:17 AM

The capital markets have seen notable activities in 2024, with many new high-profile companies making their way into the public sphere.

Reddit, a popular social platform, recently became a public company through an initial public offering (IPO) on the NYSE. Similarly, Truth Social joined the public market via a SPAC merger with Digital World Acquisition Corp to form Trump Media & Technology Group Corp.

While these events might seem focused on individual stocks, ETF investors aren't left out of the opportunity to participate in such special situations. In fact, there are unique ETFs designed specifically for gaining exposure to these types of market events,

Special situations investing doesn't limit itself to these categories; it also encompasses spin-offs, restructurings, take-private transactions and other corporate actions that can create value. Here's a look at three unique ETFs in this category to watch.

The Renaissance IPO ETF (IPO)

IPO serves as an ideal satellite allocation for portfolios, primarily because it has very low overlap with broad market indexes. At the moment, it has just one similar holding with the SPDR S&P 500 ETF ( SPY (NYSE:SPY) -0.96%), which is Johnson & Johnson spin-off Kenvue (NYSE:KVUE) Inc.

Launched in 2013, the IPO -1.16% ETF remains the only fund exclusively targeting companies that have recently gone public. Despite focusing on such a dynamic segment of the market, it's surprisingly passively managed, following the Renaissance IPO Index.

The fund undergoes rebalancing every quarter to incorporate new IPOs and removes companies that have reached their three-year post-IPO anniversary. Holdings are adjusted by float-adjusted market capitalization, with a cap of 10% to maintain diversification.

The ETF currently leans heavily towards the technology and financial sectors, accounting for 37% and 31% of its portfolio, respectively, and it predominantly invests in large-cap companies. Some of its notable investments include Coinbase (NASDAQ:COIN), Arm Holdings (NASDAQ:ARM), and Rivian (NASDAQ:RIVN).

Invesco S&P Spin-Off ETF (CSD)

When investors use backtesting software to evaluate a stock's performance, they might not get the full picture. This is because some backtesting tools may not account for spin-offs, even though they properly adjust for share buybacks, reinvested dividends, or splits. This oversight can lead to an understatement of the stock's actual returns.

A spin-off occurs when a company divides a portion of its business to create a new, independent company. Companies might choose to do this to unlock more value for shareholders, as the belief is that the separate entities will be worth more individually than as part of a larger conglomerate.

For those interested in tapping into this specialized investment strategy, Invesco offers the Invesco S&P Spin-Off ETF (CSD+0.42%). This ETF comes with a 0.65% expense ratio and, like the Renaissance IPO ETF, is passively managed.

It tracks the S&P U.S. Spin-Off Index, including stocks that have been spun off from larger entities in the last four years. Interestingly, the ETF is rebalanced monthly, ensuring its holdings accurately reflect the most recent spin-offs.

With a current portfolio of 31 holdings, CSD+0.42% shows a strong concentration in the industrials sector, making up 49% of its portfolio. Notable companies within its holdings include GE HealthCare (NASDAQ:GEHC) Technologies and Veralto, which were spun off by General Electric (NYSE:GE) and Danaher (NYSE:DHR) respectively.

IQ Merger Arbitrage ETF (MNA)

Merger arbitrage is a strategy often used by hedge funds to capitalize on the price discrepancies that can occur before and after a merger announcement.

Imagine a scenario where Company A announces its intention to buy Company B at a higher price than Company B's current market value. A merger arbitrage investor would buy shares of Company B betting on the acquisition's successful completion and the share price's eventual rise to the purchase price, meanwhile possibly short selling Company A's shares if they believe the price will drop.

This strategy, like many others, can be encapsulated within an ETF framework, offering a systematic approach to investors. MNA -0.26% is one such example.

This alternative ETF follows the IQ Merger Arbitrage Index, which includes stocks publicly announced to be targets of takeovers. Additionally, MNA employs short exposure to global markets as a hedge, aiming to reduce the correlation with broader equity markets and increase tax efficiency compared to a do-it-yourself (DIY), actively managed merger arbitrage strategy.

Among its current top holdings are two energy companies, Hess Corp (NYSE:HES) and Pioneer Natural Resources (NYSE:PXD), which are anticipated to be acquired by Chevron (NYSE:CVX) and Exxon Mobil (NYSE:XOM), respectively.

This content was originally published by our partners at ETF Central.

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