IndexIQ Launches Mergers Arbitrage ETF

Recently, IndexIQ made headlines when it launched two ETFs designed to be alternative hedges against inflation. In their first week of trading, however, both the IQ CPI Inflation Hedged ETF (CPI - commentary - Trade Now) and the IQ ARB Global Resources ETF (GRES - commentary - Trade Now) have failed to gain much of a following. The average volumes for the two funds are just shy of 6,000.

Now, IndexIQ is launching a new fund designed to allow investors to play mergers and acquisitions.

The IndexIQ ARB Merger Arbitrage ETF will seek to reflect the performance of its underlying index, the IndexIQ ARB Merger Arbitrage Index. The fund will trade under the symbol MNA. MNA's index will consist of a number of global firms for which there has been a public announcement of a takeover. Additionally, the index will include short exposure to global equities as a hedge.

Looking at the sector breakdown for this fund's index as of Sept. 30, it appears that the fund was heavily weighted in health care, consumer staples and cash positions. These three sectors represent over 58.5% of the fund's total holdings. Eligible nations from which holdings can come from include Europe, Asia/Pacific region and North America. Most of the fund's holdings, however, will be likely be U.S. companies -- the U.S. accounts for nearly 77% of the index. Other specific nations represented include Australia (8.3%), Canada (3.9%) and the U.K. (1%).

Returns for MNA are generated by purchasing stakes in acquired firms at a lower price than the announced takeover price. While successful completion of the agreement will aid the fund's performance, a fallout from either side of the agreement will likely punish investors. With the elevated risk associated with this fund, only the gutsiest ETF investors should dabble.

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At the time of publication, Dion had no positions in the stocks mentioned.

Don Dion is president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.