Is The M&A Arbitrage ETF For You? (MNA)

IndexIQ is no stranger to ETFs with non-traditional investment goals.  IndexIQ recently launched an ETF called the IQ ARB Merger Arbitrage Exchange-Traded Fund (NYSE: MNA), which is the first ETF we have seen out there that tracks merger arbitrage.  The aim is to track the performance of a basket of mergers which the index invests in with the ultimate goal of capturing the difference between a merger price upon closing and the current price of the acquired company.

This seeks investment results that are meant to track the price and yield performance of the IQ ARB Merger Arbitrage Index, which invests in global companies where a public announcement of a takeover by an acquirer has already come about.  This is aimed to replicate what was reserved for merger arbitrage funds and will allow retail and individual investors a chance to play in that game.

IndexIQ also noted that the ETF-based approach will offer investors a number of advantages, including intra-day liquidity, portfolio transparency, and low fees.

Despite the notion that the ETF will invest in equities, this index does not really give equity returns.  Seeing as that the majority of announced public mergers do close, this generally tends to offer enhanced returns compared to bonds.  Here is the performance data (in percentages) from IndexIQ:

YTD    1-Year    3-Year  5-Year
19.48    13.75    4.94    10.00… IQ ARB Merger Arbitrage Index
23.34    19.21    -5.51    3.20…. MSCI World Index

Again, this is not just US mergers as it can invest in major developing countries.  It also has guidelines over the certainty of a merger’s chances of closing and is reconstituted and rebalanced monthly.  No single common stock index component may have a weighting greater than 15% at each rebalance and reconstitution date.

What is also interesting here is that the methodology notes that the final common stock index component weights are scaled to 90% to provide for a 10% aggregate allocation of no more than 5% each to at least 2 inverse and/or ultra inverse ETFs.  We will have to see this in action, because that can create tracking errors for at least a part of the ETF.

JON C. OGG