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IndexIQ introduces merger arbitrage ETF

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IndexIQ, a developer of index-based alternative investment solutions, has introduced the first merger arbitrage exchange-traded fund designed to give investors exposure to global corporate merger and acquisition activity.

The IQ ARB Merger Arbitrage ETF seeks to provide capital appreciation by investing in global companies for which there has been a public announcement of a takeover by an acquirer, a strategy generally known as merger arbitrage.

This strategy generally seeks to take advantage of the price differential, where it exists, between the current trading price of a stock and the price of that stock at the time the deal is completed.

“To date, investors have not had broad access to capitalise on mergers and acquisitions activity in an ETF,” says Adam Patti, chief executive officer at IndexIQ. “The Merger Arbitrage ETF is a hedged strategy designed to take advantage of price disparities that exist in merger activity and strengthen investor portfolios by buying below the target price and realizing the capital appreciation if the deal closes at or above the target price. As such a strategy has not previously been accessible in an ETF offering investors a highly liquid, transparent, low cost, and easily tradable product, we are very excited about providing this ETF solution to investors.”

Merger arbitrage funds typically have the potential to benefit from buying target companies below the target price. The spread in price can be quite lucrative for investors, especially if there are competitive bids for a company.

Given today’s relatively low corporate valuations and the significant amount of cash on corporate balance sheets, industry experts forecast a rapid increase in M&A activity. Cash on the books of non-financial companies in the S&P 500 Index hit a record of more than USD700bn as of June 2009, up more than eight per cent in the past year and 16 per cent above the level of two years ago.

The ETF seeks to track, before fees and expenses, the performance of the IQ ARB Merger Arbitrage Index. The 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. This approach is based on a passive strategy of owning certain announced takeover targets with the goal of generating returns that are representative of global merger arbitrage activity. The index also includes short exposure to global equities as a partial equity market hedge.
 

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