Market Overview

Bad ETF Trade Idea Of The Week: Merger Arbitrage ETF

August is typically a boring month for the markets, especially when it comes to mergers & acquisitions activity, but that theory was shattered this week with a spate of multi-billion M&A news.

In the banking sector, First Niagara Financial (Nasdaq: FNFG) said it would acquire NewAlliance (NYSE: NAL) for $1.5 billion. In tech, Intel (Nasdaq: INTC) will buy McAfee (NYSE: MFE) for $7.7 billion.

There are rumors that Arcelor Mittal (NYSE: MT) may be interested in U.S. Steel (NYSE: X) and staying in the materials space, BHP Billiton (NYSE: BHP) is going hostile to get Potash (NYSE: POT) for $39 billion.

Yet none of this has been good news for the IQ ARB Merger Arbitrage ETF (NYSE: MNA). MNA has been mentioned as a way to play imporved M&A activity, but here's the problem with that thesis: You'll have to wait for the ETF to add stocks like McAfee, NewAlliance and Potash, assuming that company agrees to a takeover.

MNA tracks the performance of ANNOUNCED takeover targets, so right now, you'll find stocks like Smith International (NYSE: SII), Qwest (NYSE: Q) and Australia's Arrow Energy among the top 10 holdings.

The risk to the average investor with MNA is that its constituents have already made their best moves before the stocks find their way into the ETF.

Since a bidding war for Potash may emerge or BHP could be forced to make a higher offer, MNA could, in theory, add Potash right away, making the ETF a bit more attractive, but if that doesn't happen, MNA just isn't a great idea at this point.

Figure it this way: M&A activity is definitely picking up, but the ETF is down in the past week and the past month.

Posted-In: Long Ideas News Short Ideas Specialty ETFs Rumors M&A Trading Ideas ETFs

 

Related Articles (FNFG + BHP)

Around the Web, We're Loving...

Get Benzinga's Newsletters