M&A Showdown!

A look at how to incorporate merger arbitrage into your portfolio.

On this week's ETFiQ show on Bloomberg, they looked at some alternative ETFs and posted the following table.

They said that MNA had recently overtaken QAI as the largest alternative strategy ETF (some clients own QAI). Long time readers might recall that I have been a big believer in merger arbitrage as an alternative strategy to try to manage portfolio volatility. I've owned the Merger Fund (MERFX) for clients for many years. MNA is a 5 Star fund so it is clearly doing something right but as I look at chart comparisons to MERFX it looks like MERFX outperforms most of the time. The least flattering chart for MERFX compared to MNA is the five year as follows;

The reason I never switched to MNA despite the advantages of the ETF wrapper is that I believe the strategy is inferior. Instead of shorting the acquirer, typical of merger arbitrage, MNA gets its short exposure through broad indexes, sectors and there is also a currency overlay. For example if Big Bank is acquiring Small Bank, instead of shorting Big Bank, it will short a financial sector ETF. I am sure Index IQ has plenty of research to support their method, but it just seems like a less efficient way to capture the effect.

As I have said countless times before, it is not logical to think that one single wrapper can always be the best and that is where I think we are with MNA versus MERFX. The point is to be open to different products, almost wrapper agnostic.

The picture in the header for this post is from Canyonlands National Park near Moab, UT taken over the weekend, this one is from Black Canyon of the Gunnison National Park near Montrose, CO.

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