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ETF Wrap

Oct. 5, 2020, 1:23 p.m. EDT

ETF Wrap: How to think about – and play – the wave of M&A activity

By Andrea Riquier

This past week hasn’t been so much about tech under-performing as everything else trying to catch up. Real estate ETFs (like XLRE) bounced on Monday. On Tuesday, it was utilities’ turn (XLU, VPU). Home builders (XHB, ITB) continued their year-to-date winning streak Wednesday after the release of an industry report that confirmed strong demand for housing.

Stocks got a boost early this week after a spate of merger and acquisition news , including an announcement by Gilead that it would buy Immunomedics Inc. , which makes a promising cancer drug. The news helped boost the Defiance Nasdaq Junior Biotechnology ETF (NAS:IBBJ) , which gained nearly 13% over the week.

Biotech is one of the biggest “sub-themes” in the ETF world, Defiance President Paul Dellaquila told MarketWatch, with about $20 billion in assets. But Dellaquila, an iShares veteran, saw a gap in offerings: not many funds focused on the small- and mid-cap companies.

Ironically, that’s where Dellaquila saw the most potential. Such companies are what he calls “the up-and-comers” (and acquisition targets) in a space that he believes transcends traditional market cycles. IBBJ is the biggest ETF holder of Immunomedics, with a little over 6% of its portfolio allocated to it.

“One thing that everyone has consensus on is they want to live longer and healthier lives,” he said. “There is a benefit to owning ETFs in this space. There are going to be winners and losers. This way you have a diversified way to play the winners and losers.”

If investors think the action of the past week or so signals the beginning of a wave of consolidation, there’s an ETF with ticker tailor-made for that strategy, notes Todd Rosenbluth, head of ETF and mutual fund research for CFRA. MNA, the IQ Merger Arbitrage ETF (PSE:MNA) , takes a long position in companies that have announced they are in the process of being acquired, while shorting the broader market.

That means that the fund, which rebalances monthly, could scoop up Immunomedics. Current holdings include E-Trade Financial , which is in the process of being acquired by Morgan Stanley (NYS:MS) , and Tiffany & Co. (NYS:TIF) , whose takeover by LVMH may be doomed. Like IBBJ, Rosenbluth said, this is an investing strategy that isn’t guaranteed, but “the benefit of an ETF is that most of these deals get completed, and you spread that risk around.” And it’s worth noting that shares of acquisition targets trade at a slight discount to the offer price.

Link to MarketWatch's Slice.