An exchange-traded fund employing a passive merger arb strategy made its trading
debut Tuesday. Dubbed the IQ ARB Merger Arbitrage ETF (NYSE Arca:MNA), it's the work of Index IQ, a Rye, N.Y., developer of index-based alternative investment products. Index IQ already sponsors several other ETFs that mimic hedge fund strategies.
Some arbs are skeptical about the ETF's prospects as an investment. This
piece on Seeking Alpha (by Thomas Kirchner, manager of one of the half-dozen or so mutual funds pursuing merger arb strategies), notes several weaknesses, including: 1) The index on which it is based is rebalanced only monthly, a long time in the deal world; and 2) Unlike real arbs, it doesn't short the stock of acquirers, shorting an index instead.
And indeed the ETF may stumble, especially in a period when deals get harder to complete.
But if the M&A market heats up -- as the folks at Index IQ expect -- it's also possible that the ETF will catch on, at least for a while. The company's
top execs (who hail from Time Inc., where they worked on index products) do seem to know something about marketing financial products.
Then what? Well, as we've seen in the commodity markets, ETFs and ETNs can be a powerful force in channeling money into a sector -- to the point where regulators, fearing price distortion, have felt obliged to
intervene.
If the new instrument does attract a new pile of money to the strategy, active arbs could see spreads narrowing more quickly than they ordinarily do when the M&A cycle ramps up. That would make a tough business a bit tougher. -
Kenneth Klee
Join Corporate Dealmaker's LinkedIn forum
,
Adele Gulfo
And the winners are...
Spreads will not be affected by the MNA ETF because it is not shorting the acquirer. They are simply buying the target. It is a long fund with a systematic overlay, therefore there is no impact on spreads in stock-for-stock deals.
As far as cash deals are concerned, however, there could indeed be an impact on spreads.