ProShares, the largest provider of leveraged and inverse ETFs, today is listing on the BATS exchange a merger-arbitrage ETF that would go head-to-head with an IndexIQ fund.
The ProShares Merger ETF (BATS: MRGR) tracks the S&P Merger Arbitrage Index and captures the spread between the stock price of a target company at the time a merger-and-acquisition deal is announced, and the price that the acquiring company will pay, according to the fund’s prospectus.
That spread exists because of uncertainty that the deal will actually take place—how much risk is involved in the transaction and how long it takes to conclude it directly impact how wide that spread can become. At the end of the day, MRGR gains when, in a closing deal, the price of the target company nears the proposed acquisition price, the filing said.
The strategy is akin to what IndexIQ’s IQ ARB Merger Arbitrage ETF (NYSEArca: MNA) sets out to do, and is the latest example of ETF providers getting creative to develop products that tap into niche segments in an effort to find performance in periods of lackluster economic growth.
ProShares’ MRGR takes long positions in the company targeted for a takeover and shorts the acquiring company when the deal involves an exchange of that company’s stock. That short hedge is an effort to minimize the impact a drop in value in those shares would have on the spread, the filing said.
By comparison, IndexIQ’s MNA buys stocks of companies that are faced with a takeover while shorting exposure to the broad global market in an attempt to capture M&A-related returns.
The fund, which pursues the same strategy a classic M&A hedge fund would and tracks a proprietary index, has gathered little more than $13.5 million since it came to market in 2009.
MRGR will cost a total of 0.75 percent in annual fees after waivers and reimbursements totaling 1.36 percent are taken into account. By comparison, MNA costs 0.76 percent, according to data on IndexIQ’s website.
Joining iShares On The BATS Board
MRGR marks ProShares’ first listing with Kansas City-based BATS Exchange, only the second ETF issuer to list on the midwestern board. The exchange said it has already petitioned to list another three ProShares ETFs in 2013.
San Francisco-based iShares was the first issuer to list on BATS—its first ETF went live there in January—and has currently 16 ETFs listed there, nine of which are single-country funds and the remainder are fixed-income strategies.
BATS has worked to distinguish itself from its competitors by focusing on taking special care of ETF providers, Joe Ratterman, chairman and chief executive officer of BATS, has said.
“iShares’ decision to list on BATS underscores the commitment that we are placing on ensuring our market is issuer-focused and concentrates on market quality,” Ratterman said at the time iShares listed its first ETF there.
Part of that effort has been the implementation of the BATS Competitive Liquidity Provider Program, designed to keep market makers in the center of trading traffic, even when markets turn volatile.
The rewards-based program pays daily incentives to market markets for increasing liquidity and keeping spreads tight on all ETFs listed on the exchange.
“The BATS Competitive Liquidity Provider program has proven to be effective at incenting tighter spreads and more size at the national best bid and offer (NBBO) for issues listed at BATS, which in turn lowers the cost of trading for institutional and retail investors,” Ratterman said in a press release.
“We look forward to implementing this program for the ProShares Merger ETF,” he said.
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