Make Money in Merger Arbitrage -- the Easy Way


Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to invest in some merging companies in your portfolio, the IQ Merger Arbitrage ETF could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

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

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The IQ ETF's expense ratio -- its annual fee -- is 0.76%. The fund is very small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF is too new to have a sufficient track record to assess. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why mergers?
Some might be interested in merging companies because there are sometimes discrepancies in their prices and also because once a buyout plan is announced, until it is completed, things can change -- with new bidders occasionally emerging, for example.

Recent occupants of the ETF include Clearwire and McMoRan Exploration . Clearwire is in the process of trying to combine with Sprint Nextel and Japan's Softbank. If the deal is approved (the FCC is expected to decide by May 29), the new entity will be a strong competitor in the telecom arena, with my colleague Anders Bylund explaining: "That three-way combination puts Sprint's large subscriber Rolodex together with Softbank's cash reserves and maverick business ideas, underpinned by Clearwire's generous spectrum license catalog. This Frankencarrier should scare the snot out of its direct rivals."

Meanwhile, Freeport McMoRan Copper & Gold is buying McMoRan Exploration and Plains Exploration and Production. The mining specialist is diversifying its operations with these energy-focused companies, a move that some welcome and others doubt, seeing it as a dilution of focus. The stock looks attractive, trading near a 52-week low and with a forward P/E ratio of just 8. It sports a 3.8% dividend, too, and management is expecting moderate growth in the near term. One worry, though, is the possibility of interest-rate increases from the Federal Reserve, which can make some alternatives to gold more attractive. Still, Freeport is a low-cost producer of copper and molybdenum, positioned to benefit quickly from upturns in metals pricing. Its fourth-quarter earnings report was stronger than expected.

The big picture
A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

After putting together a blockbuster deal to expand into the oil and natural gas industry, Freeport-McMoRan will have plenty on its plate as it tries to adapt to the new industry, as expanding into oil and gas carries plenty of inherent volatility. FCX had a profitable copper business, and on top of this foray into a new industry it still has to contend with mining industry bellwether BHP Billiton. To help investors determine if Freeport-McMoRan is a buy or a sell, The Motley Fool has compiled a premium research report on the company. Simply click here now to access your copy today.

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Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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