Liquid Alternatives: The First Trust Merger Arbitrage ETF Will Skim Merger Spreads

It’s a hedge fund type, actively managed ETF. But don’t balk at its fees.

The First Trust Merger Arbitrage ETF (MARB), which is in the process of being listed in the US, will profit from merger spreads.

In a merger arbitrage strategy, the fund will purchase and sell the stocks of two merging companies to profit from pricing inefficiencies in the two stocks. The profits are thereby locked in on an almost riskless basis, though there is the danger that the transaction may fall through for reasons such as regulations, financial instability, or tax complications.

The fund may also have to sit on cash in the event of a slowdown in deal-making activity.

First Trust Merger Arbitrage ETF and merger spreads

So the First Trust Merger Arbitrage ETF (MARB) would typically buy the stock of the company being acquired, and short that of the acquirer, according to ETF Stream.

What should one expect from MARB?

For instance, the IQ Merger Arbitrage ETF (MNA) generated a 3-year annualized market total return of 3.99% compared to 7.79%, the median return for this asset class. The MNA ETF had assets of $968.5 million as at end-January, 2020, and a net expense ratio of 0.77%.

In contrast, the First Trust Merger Arbitrage ETF (MARB) imposes a fee of 1.94%, quite akin to hedge funds. Of this, its own management fee is 1.25%.

Why the high fees?

More on First Trust – and its absence from fee wars

First Trust is an ETF fund house that is deliberately low-profile, even though it’s the sixth-largest ETF provider in the US.

The reason – it makes financial advisors its public face and is not afraid to charge high fees. It has purposefully stayed away from the recent fee wars. The fund house has also steadfastly refused to go the rob-advisor way or to provide advice directly.

It, therefore, has its advisors’ back.

“We’re very focussed on providing tools for advisors. We don’t tend advertise much to the retail public. Retail investors are best served by financial professionals in our opinion. That’s why we’re a little bit under the radar,” said Ryan Issakainen, Senior Vice President at First Trust to ETF Stream.

Related Story:  Alternative Investments: Christmas Cheer as Fund Managers Cut Fees                                                  

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January 29, 2020

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