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 The exchange-traded fund (ETF) pie is getting sliced thinner and thinner with the floatation of ever more portfolios. Case in point: A fund based on the unfortunately acronymed IPOX-100 Index was recently launched. (IPOX sounds vaguely bubonic, doesn't it?) The ETF's underlying benchmark, designed by the research firm IPOX Schuster LLC, tracks 100 recent initial public offerings (IPO).
This column has gone on record (First Quarter 2004) with its views on index proliferation. Back then, the two biggest index manufacturers-Standard & Poor's and Dow Jones-tallied 329 indexes on U.S. equities between them. Not that there's anything wrong with that (thank you, Jerry Seinfeld), but sometimes the slicing and dicing seems nonsensical.
When that original column went to press, the Investment Company Institute counted 72 ETFs tracking the domestic equity market. By March 2006, the number had more than doubled to 157. More portfolios are being added by the day: A raft of ten new subsector ETFs here, another block there. Are we destined to see a glut of equity ETFs again? You recall the subsector ETFs that were ignominiously retired in 2002, don't you?
Well, sector and subsector indexes are one thing: commodities of a sort. The big ETF manufacturers have locked in the licensing of the heavy-duty index lines, leaving indexeurs nouveaux to pick around the margins with proprietary inventions like the new IPO benchmark.
Not that there's anything wrong with that ...
With the pace of wheeling and dealing these days, however, it's surprising that no one has yet cooked up an ETF based upon mergers and acquisitions. Increasing hedge fund and private equity interest seems to be setting up a record year for M&A activity.
The idea of an M&A index gets a boost from an obscure bit of research conducted by Gary Smith, the Fletcher Jones Professor of Economics at Pomona College. Refreshingly titled Would a Stock By Any Other Ticker Smell as Sweet? Smith's paper takes note of the extraordinary performance of cleverly tickered stocks such as Southwest Airlines (LUV) and Internet America (GEEK). Smith's research pitched an equal-weighted portfolio of these issues against the universe of Nasdaq- and NYSE-listed issues in the Center for Research in Security Prices database.
In a direct challenge to the efficient market hypothesis, Smith's index of clever-ticker stocks beat the market by, as Smith puts it, "a substantial and statistically significant margin" over the past two decades. Overall, the clever-ticker portfolio produced a 23.6 percent annual compounded return, compared to the 12.3 percent return churned out by the Nasdaq/NYSE benchmark.
So what's this got to do with mergers and acquisitions? While providing no definitive explanation for clever-tickered stocks' outperformance, Smith ponders, "Perhaps a clever ticker ... has a subtle, but persistent, influence on investors who buy the stock and on those who are considering a merger or acquisition."
Hmmm ... could two cleverly tickered outfits attract the attention of one another?
The lust for money could thus be made manifest by the magnetism between Meta Financial Group (CASH) and Crazy Woman Creek Bancorp (CRZY). CASH CRZY, get it? Going further, would the potential combination of the Canadian firms ONX Enterprise Solutions (ON) and Crossoff Inc. (OFF) flash a signal of future profits?
Has the time passed for the union of Dynamic Materials Corp. (BOOM) with BOC Group (BOX)? If the Chicago Board of Trade (BOT) wanted to develop a real estate bourse, would the acquisition of Housevalues, Inc. (SOLD) make sense? And while we're thinking of things mercantile, folding Buy.com Inc. (BUYY) into Lowe's Companies (LOW) seems to portend potential profit.
Investment bankers would likely snap to attention when struck with the thought of cobbling together Allegheny Energy Inc. (AYE) with SIRVA Inc. (SIR). The blending of Charlotte Russe Holding Inc. (CHIC) with First of Long Island Corp. (FLIC) might even bring tears to their eyes, but there's a certain Marie Antoinette-like haughtiness in restaurant powerhouse Brinker International's (EAT) gobbling of Cheesecake Factory, Inc. (CAKE).
And, in this era of soaring fuel prices, how could a deal between Canada's Oilexco, Inc. (OIL) and Transocean Inc. (RIG) go wrong?
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