HDG ProShares Hedge Replication

ProShares is arguably one of the most famous purveyors of leveraged and inverse ETFs on the market today. The company has literally dozens of these geared products and has pretty much made its name on these funds.

However, that doesn’t mean that the company has completely abandoned the ‘regular’ ETF world either, as the fund firm actually has eight unleveraged/non-inverse funds on the market. These include several bond products, a couple volatility ETFs, and some more exotic hedge fund focused items as well.

These hedge fund-like ETFs-- led by the company’s CSM, RALS, and HDG—have combined to obtain a decent level of interest, although none have seen a blockbuster level of asset accumulation. Still, the leveraged and inverse ETF market is arguably tapped out for the time being, which is probably why ProShares is looking to expand its lineup of more unique products with its latest SEC filing (read 4 Low-Volatility ETFs to Hedge Your Portfolio).

In the document, which saw an initial filing a while back but was recently updated with new and important information, the company revealed plans for a new merger arbitrage ETF. This strategy, which has been a popular one among all stripes of investors over the years, looks to expose its portfolio to firms that find themselves as takeover targets before the buyout actually goes through.

Furthermore, those that are actually doing the acquiring are shorted, in order to give a more market neutral approach. In this way, the technique looks to profit on the spread between the announced purchase price and the lower price that the security trades at before the deal actually goes through (read IndexIQ Launches New Market Neutral ETF).

While there is some concern that a given deal doesn’t go through, the strategy is seen by many as a lower risk way to invest that is also broadly uncorrelated to market returns. In order to play this in ETF form, the potential new fund from ProShares looks to trade under the ticker of MRGR and will cost 75 basis points a year in fees after a significant amount of waivers.

MRGR in Focus

The proposed fund looks to track the S&P Merger Arbitrage Index, a benchmark of up to 40 takeover targets that are traded within developed market countries. The weights in the long positions are initiated at 3% of the portfolio while the corresponding short weighting for the acquirer looks to be between 0% and -3%.

Additionally, investors should note that a T-bill component will be in the fund to occupy the rest of the assets when the portfolio is less than 100% invested. Furthermore, deals are screened out based on liquidity, size, and the spread, so there are some stipulations (see Does Your Portfolio Need a Hedge Fund ETF?).

ETF Competition

While the potential ProShares ETF sounds intriguing, investors should know that there already other options in the merger arbitrage space.  In fact, there are actually three ETFs already on the market that use the technique, suggesting some stiff competition.

The two most popular are actually ETNs from Credit Suisse; CSMA and CSMB. Both of these track the same index, except CSMB utilizes a leveraged approach in order to accomplish its objective.

The other option out there is IndexIQ’s MNA which uses a similar approach to the others on the list while charging 76 basis points a year in fees. While the volume and AUM are quite low for this one, the index beta against the S&P 500 is just 0.3, suggesting highly uncorrelated returns (see Three Hedge Fund ETFs for Uncorrelated Returns).

However, combined, the three have just a little over $150 million in assets so it isn’t like a huge lead has been developed by any one fund. Still, this lack of dollars in the space could also suggest that the technique really isn’t that popular—or it at least hasn’t caught on—among the everyday investor.

With that being said, the space could be intriguing for those seeking equity exposure with lower levels of risk. While the space has greatly underperformed markets in YTD time frames, it has also exhibited a great deal less in volatility, suggesting that if MRGR is able to pass regulatory hurdles, it could offer up investors one more way to achieve lower volatility investments with a time tested strategy.

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PRO-CS 130/30 (CSM): ETF Research Reports
 
CS-MRGR ARB IDX (CSMA): ETF Research Reports
 
CS-MRG AR 2XNET (CSMB): ETF Research Reports
 
PRO-HEDGE REPL (HDG): ETF Research Reports
 
IQ-MERGER ARB (MNA): ETF Research Reports
 
PRO-RAFI L/S (RALS): ETF Research Reports
 
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