ProShares, the Bethesda, Maryland-based premier provider of alternative ETFs and the world’s largest provider of geared (leveraged and inverse) exchange traded funds, has announced the launch of a merger-arbitrage ETF this week.
The ProShares Merger ETF (MRGR), the firm’s 13th launch this year, is listed on the BATS exchange and would compete with IndexIQ’s ARB Merger Arbitrage ETF (MNA).
MRGR will track the S&P Merger Arbitrage Index, a benchmark that holds up to 40 publicly announced deals within developed market countries through a combination of long and, in certain cases, short security positions, denominated in local currencies.
Additionally, the deal value (cash plus stock) will have to be at least half a billion dollars and average daily trading value must reach two million over the past three months for liquidity calculations.
The index provides exposure to a global merger arbitrage strategy and seeks to capture the spread between the price at which the stock of a company (the “target”) trades at after an offer has been made and the actual deal price that has been offered to the target’s shareholders and the management by the acquiring company.
Such a spread exists typically due to the uncertainty that the announced merger, acquisition or other corporate restructuring will succeed and if it does, such a deal will close at the initially proposed terms.
For deals that close, the price of the target’s shares approach the proposed acquisition price by the deal closing date, resulting in a gain. The strategy to capture this spread, which depends on several factors, including the perceived risk of the deal closing and the expected length of time until the deal is completed.
For deals that fall through, the target’s price commonly falls back to pre-announcement levels, making the strategy relatively risk-free. The profits from deals that are consummated are thus uncorrelated to markets and may be suitable for investors looking to avoid exposure in today’s market environment.
The index takes long position in target securities and simultaneously goes short on the acquiring company when the deal involves an exchange of the acquirer’s stocks. The short position helps in reducing the effect of price declines, which is typical of an M&A deal, on the spread.
Please note that transactions that have an implied deal price at least 2 percent above the stock price immediately after the announcement, are only included in the index. Also a cash component of three-month T-bills is included in the index when net exposure from included deals is less than 100 percent.
The index is biased towards consumer, industrial and energy firms and is tilted towards large caps. Geographically, North American stocks (US and Canada) comprise the majority with Asia and Europe accounting for nearly all the rest of the assets.
The fund has an expense ratio of 0.75 percent.
This is a complicated set up indeed and one that would make me want to see a comprehensive pricing history first, before I consider this investment material. It’ll be on the list to be reviewed late next year.
Disclosure: No holdings