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After several quiet years, global M&A activity gathered steam early in 2024 following a flurry of deals. The deal value surged 55% year over year to $425 billion, according to data compiled by Bloomberg, signaling a robust revival in the sector.
The revival is partly attributed to a stabilizing interest rate environment, which has enhanced valuation certainty, and a buoyant stock market, providing companies with additional resources for acquisitions. Despite ongoing geopolitical tensions and economic uncertainties, the early momentum in 2024 surpassed expectations, with significant deals across various sectors, including technology, natural resources and financial services.
The United States is at the forefront of this resurgence, with the biggest transaction being the acquisition of Discover Financial Services by Capital One Financial (COF - Free Report) for $35 billion. The potential merger represents a significant consolidation within the financial sector, merging two of the nation's leading lenders and credit card issuers. This transaction is among the multiple billion-dollar deals that represent the early signs of a potential recovery in M&A activity (read: Capital One to Acquire Discover Financial: ETFs in Focus).
Chip-design company Synopsys Inc.’s purchase of software developer Ansys Inc. for about $34 billion in cash and stock and Diamondback Energy Inc.’s (FANG) $26 billion deal to acquire fellow Permian Basin driller Endeavor Energy Resources LP are also among the big deals. In financial services, investment giant BlackRock Inc. (BLK) announced the purchase of Global Infrastructure Partners for $12.5 billion. Other notable deals include Truist Financial Corp.'s (TFC) sale of its insurance brokerage business for $15.5 billion and Walmart’s (WMT) acquisition of Vizio Holding Corp. (VZIO) for approximately $2.3 billion.
How to Tap?
Investors could easily take advantage of the 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 a few merger ETFs to capitalize on the surge from the increasing M&A deals. Any of these could make compelling options for investors seeking to implement this low-correlation strategy in their portfolio:
IQ Merger Arbitrage ETF offers capital appreciation by investing in global companies for which there has been a public announcement of a takeover by an acquirer. This is done by tracking the IQ Merger Arbitrage Index. The fund has 52 holdings in its basket and charges 77 bps in annual fees. IQ Merger Arbitrage ETF has amassed $307.5 million in its asset base and trades in an average volume of around 130,000 shares a day (read: What Lies Ahead of M&A ETFs in 2024?).
AltShares Merger Arbitrage ETF follows the Water Island Merger Arbitrage USD Hedged Index, which is designed to reflect a pure-play, global merger arbitrage strategy investing in definitive, publicly announced mergers and acquisitions. It holds 49 stocks in its basket and charges 76 bps in annual fees.
AltShares Merger Arbitrage ETF has accumulated $57.1 million in its asset base and trades in an average daily volume of 15,000 shares.
First Trust Merger Arbitrage ETF is an actively managed fund that establishes long and short positions in the equity securities of companies that are involved in a publicly announced significant corporate event, such as a merger or acquisition. It holds 25 stocks in its basket with AUM of $51.5 million.
First Trust Merger Arbitrage ETF has an expense ratio of 1.80% and trades in an average daily volume of 21,000.
ProShares Merger ETF 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 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. ProShares Merger ETF holds a well-diversified portfolio of 30 stocks and charges 75 bps in annual fees. It has been able to manage assets worth $10 million while it sees a light volume of just 3,000 shares a day.
Bottom Line
While investors could capitalize on merger arbitrage by trading in a particular target company stock, the ETFs provide a diversified exposure in the basket form with lower risk. Further, these could be excellent choices for investors in a rocky market due to their low correlation with the overall market.
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.
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ETFs to Make the Most of the M&A Comeback
After several quiet years, global M&A activity gathered steam early in 2024 following a flurry of deals. The deal value surged 55% year over year to $425 billion, according to data compiled by Bloomberg, signaling a robust revival in the sector.
The revival is partly attributed to a stabilizing interest rate environment, which has enhanced valuation certainty, and a buoyant stock market, providing companies with additional resources for acquisitions. Despite ongoing geopolitical tensions and economic uncertainties, the early momentum in 2024 surpassed expectations, with significant deals across various sectors, including technology, natural resources and financial services.
The United States is at the forefront of this resurgence, with the biggest transaction being the acquisition of Discover Financial Services by Capital One Financial (COF - Free Report) for $35 billion. The potential merger represents a significant consolidation within the financial sector, merging two of the nation's leading lenders and credit card issuers. This transaction is among the multiple billion-dollar deals that represent the early signs of a potential recovery in M&A activity (read: Capital One to Acquire Discover Financial: ETFs in Focus).
Chip-design company Synopsys Inc.’s purchase of software developer Ansys Inc. for about $34 billion in cash and stock and Diamondback Energy Inc.’s (FANG) $26 billion deal to acquire fellow Permian Basin driller Endeavor Energy Resources LP are also among the big deals. In financial services, investment giant BlackRock Inc. (BLK) announced the purchase of Global Infrastructure Partners for $12.5 billion. Other notable deals include Truist Financial Corp.'s (TFC) sale of its insurance brokerage business for $15.5 billion and Walmart’s (WMT) acquisition of Vizio Holding Corp. (VZIO) for approximately $2.3 billion.
How to Tap?
Investors could easily take advantage of the 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 a few merger ETFs to capitalize on the surge from the increasing M&A deals. Any of these could make compelling options for investors seeking to implement this low-correlation strategy in their portfolio:
IQ Merger Arbitrage ETF (MNA - Free Report)
IQ Merger Arbitrage ETF offers capital appreciation by investing in global companies for which there has been a public announcement of a takeover by an acquirer. This is done by tracking the IQ Merger Arbitrage Index. The fund has 52 holdings in its basket and charges 77 bps in annual fees. IQ Merger Arbitrage ETF has amassed $307.5 million in its asset base and trades in an average volume of around 130,000 shares a day (read: What Lies Ahead of M&A ETFs in 2024?).
AltShares Merger Arbitrage ETF (ARB - Free Report)
AltShares Merger Arbitrage ETF follows the Water Island Merger Arbitrage USD Hedged Index, which is designed to reflect a pure-play, global merger arbitrage strategy investing in definitive, publicly announced mergers and acquisitions. It holds 49 stocks in its basket and charges 76 bps in annual fees.
AltShares Merger Arbitrage ETF has accumulated $57.1 million in its asset base and trades in an average daily volume of 15,000 shares.
First Trust Merger Arbitrage ETF (MARB - Free Report)
First Trust Merger Arbitrage ETF is an actively managed fund that establishes long and short positions in the equity securities of companies that are involved in a publicly announced significant corporate event, such as a merger or acquisition. It holds 25 stocks in its basket with AUM of $51.5 million.
First Trust Merger Arbitrage ETF has an expense ratio of 1.80% and trades in an average daily volume of 21,000.
ProShares Merger ETF (MRGR - Free Report)
ProShares Merger ETF 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 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. ProShares Merger ETF holds a well-diversified portfolio of 30 stocks and charges 75 bps in annual fees. It has been able to manage assets worth $10 million while it sees a light volume of just 3,000 shares a day.
Bottom Line
While investors could capitalize on merger arbitrage by trading in a particular target company stock, the ETFs provide a diversified exposure in the basket form with lower risk. Further, these could be excellent choices for investors in a rocky market due to their low correlation with the overall market.
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.