What Do You Do For an Encore?

by: , Chief Investment Officer and Managing Director | IndexIQ

In my last post, I talked about just what kind of a market we were diving into when we launched our first-ever ETF: QAI. While that launch certainly showed us just how much work we had cut out for us, we were excited to have our first product on the market, and our thoughts quickly turned to the inevitable question: “what next?”

Well…

Mergers & acquisitions have always been a subject of interest with investors. The deals are out there, sometimes bubbling up in headlines, but there’s no real way to know what’s coming. That realization underpins the concept of merger arbitrage strategies, which seek to benefit from the pricing inefficiencies that often accompany a merger announcement.

As we watched the reaction to the rollout of QAI and debated which of our ideas would become our encore, we kept coming back to this particular concept.

Merger arb was another alternative strategy that had never been effectively captured in an ETF. We liked the challenge that presented, so we went about researching and putting together the rules needed for an index that could underlie a successful fund.

To understand how this works you have to know that merger arb doesn’t speculate on the who, what or why of a takeover. It looks to take advantage of pricing inefficiencies that often develop around publicly announced deals.

Generally speaking, this occurs when the target trades at a discount to the announced acquisition price, with the “spread” expected to tighten as the deal moves forward to the closing date. This strategy is one that has been employed by a variety of hedge funds and large investors for decades Our key innovation was that we were able to design an approach that captures this price difference in a systematic way. Out of all this came the IQ Merger Arbitrage Index ETF (MNA).

We thought this would be a great follow-up to QAI. There was no shortage of deal-making a decade ago, something that has only become more true in the ensuing decade. In fact, the last few years have seen record or near-record M&A activity, both in terms of deal number and dollar value. Even in less active years, there are likely to be plenty of transactions that meet the index criteria. When and if that’s not the case, the fund can also invest in a variety of short-term instruments to wait for a better day.

Of course, deals come and go; some are completed, others not, some just time out. For that reason, the index underlying MNA is rebalanced on a monthly basis, with companies moving in and out based on deal completion and other criteria. It also includes short exposure to U.S. and non-U.S. equity indexes as a partial market hedge.

In addition to exposure to the merger arb strategy, it turns out this ETF has other benefits for investors. For example, historically it has had a lower correlation to both stocks and bonds and provided relatively stable returns across various market environments. We saw this at work last year when MNA delivered consistent returns not materially influenced by the drop in the equity and fixed income markets. In fact, MNA was up in an otherwise down 2018.

MNA Has Delivered Consistent Returns in Varying Markets

Source: Morningstar, as of 12/31/2018. The S&P 500 Index is an American stock market index based on the market capitalization of 500 large companies having common stock listed on the NYSE or NASDAQ. The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based index that measures the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market. Past performance is no guarantee of future results, which will vary. It is not possible to invest directly in an index. There can be no guarantee that investment objectives will be met. 

Similar to what I wrote last month about QAI, MNA was another sophisticated strategy launched in a developing ETF industry during a period of global market and economic uncertainty – a ambitious goal in a nerve-wracking time.

It’s now a great source of pride for my colleagues and me that over the course of the last decade, MNA has performed exactly as we had designed – and the levels of acceptance and achievements are proof. At the time of this post, MNA has surpassed $1 billion in assets1 and was just named Fund Intelligence “Alternative ETF of the Year” at the 2019 Mutual Fund and ETF Industry Awards2.

 

1. Assets under management exceeded $1 billion as of 4/12/2019.

2. Fund Intelligence’s mix of independent judges, including a range of investors such as ETF strategists, based their decisions on performance, product innovation and sales success through the year. IQ Merger Arbitrage ETF (MNA) was named 2019 “Best Alternative ETF of the Year” by the Fund Intelligence Mutual Fund and ETF Industry Awards. Award methodology: Fund Intelligence’s mix of independent judges, including a range of investors such as ETF strategists, based their decisions on performance, product innovation and sales success through the year. Learn more at mutualfundindustryawards.com.

Click on the fund name for the most current fund page, which includes, the prospectus, investment objectives, performance, risk, and other important information. Returns represent past performance which is no guarantee of future results. Current performance may be lower or higher. Investment return and principal value will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. Visit nylinvestments.com/etfs and nylinvestments.com/funds and for the most recent month-end performance. 

Consider the Funds’ investment objectives, risks, charges and expenses carefully before investing. The prospectus and the statement of additional information include this and other relevant information about the Funds and are available by visiting IQetfs.com or calling (888) 474-7725. Read the prospectus carefully before investing.

Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.

This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

Before considering an investment in the Fund, you should understand that you could lose money. Certain of the proposed takeover transactions in which the Fund invests may be renegotiated, terminated or involve a longer time frame than originally contemplated, which may negatively impact the Fund’s returns. The Fund’s investment strategy may result in high portfolio turnover, which, in turn, may result in increased transaction costs to the Fund and lower total returns. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks. These risks may be greater for emerging markets. Diversification does not eliminate the risk of experiencing investment losses. Stock prices of mid and small capitalization companies generally are more volatile than those of larger companies and also more vulnerable than those of larger capitalization companies to adverse economic developments. The Fund is non-diversified and is susceptible to greater losses if a single portfolio investment declines than would a diversified fund. The ETF should be considered a speculative investment with a high degree of risk, does not represent a complete investment program and is not suitable for all investors. The Fund may experience a portfolio turnover rate of over 100% that will increase transaction costs and may generate short-term capital gains which are taxable.

The IQ Merger Arbitrage Index is the exclusive property of IndexIQ which has contracted with Solactive to maintain and calculate the Index. IndexIQ® and IQ® are registered service marks of IndexIQ.

The IQ Merger Arbitrage Index seeks to achieve capital appreciation by investing in global companies for which there has been a public announcement of a takeover by an acquirer.

New York Life Investments is a service mark and name under which New York Life Investment Management LLC does business. New York Life Investments, an indirect subsidiary of New York Life Insurance Company, located at 51 Madison Avenue, New York, NY 10010, provides investment advisory products and services. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC and serves as the advisor to the IndexIQ ETFs. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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Salvatore J. Bruno

Chief Investment Officer and Managing Director | IndexIQ

Sal is Chief Investment Officer at IndexIQ, where his primary responsibility includes developing and maintaining the firm’s investment strategies. Sal joined IndexIQ in 2007 from Deutsche Asset Management (DeAM) where he held a number of senior positions

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