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: ETF Wrap: How to think about – and play – the wave of M&A activity

ETF Wrap is a briefing of what investors need to know in the exchange-traded sector, including exclusive commentary and interviews on the industry from MarketWatch Read More...
Catch-up trade?

This past week hasn’t been so much about tech under-performing as everything else trying to catch up. Real estate ETFs (like XLRE) bounced on Monday. On Tuesday, it was utilities’ turn (XLU, VPU). Home builders (XHB, ITB) continued their year-to-date winning streak Wednesday after the release of an industry report that confirmed strong demand for housing.

A biotech shot in the arm

Stocks got a boost early this week after a spate of merger and acquisition news, including an announcement by Gilead that it would buy Immunomedics Inc., which makes a promising cancer drug. The news helped boost the Defiance Nasdaq Junior Biotechnology ETF IBBJ, -0.19%, which gained nearly 13% over the week.

Biotech is one of the biggest “sub-themes” in the ETF world, Defiance President Paul Dellaquila told MarketWatch, with about $20 billion in assets. But Dellaquila, an iShares veteran, saw a gap in offerings: not many funds focused on the small- and mid-cap companies.

Ironically, that’s where Dellaquila saw the most potential. Such companies are what he calls “the up-and-comers” (and acquisition targets) in a space that he believes transcends traditional market cycles. IBBJ is the biggest ETF holder of Immunomedics IMMU, +0.37%, with a little over 6% of its portfolio allocated to it.

“One thing that everyone has consensus on is they want to live longer and healthier lives,” he said. “There is a benefit to owning ETFs in this space. There are going to be winners and losers. This way you have a diversified way to play the winners and losers.”

Top 5 gainers of the last week
Invesco DWA Healthcare Momentum PTH, -1.40% 7.8%
Loncar Cancer Immunotherapy CNCR, +0.60% 7.5%
Principal Healthcare Innovators Index BTEC, -1.88% 7.2%
ETFMG Treatments Testing and Advancements GERM, -2.21% 6.6%
Virtus LifeSci Biotech Products BBP, -0.93% 6.4%
Source: FactSet, through close of trading Wednesday, September 16, excluding ETNs and leveraged products
Top 5 losers of the last week
First Trust Natural Gas FCG, -1.02% -4.8%
InfraCap MLP AMZA, -1.69% -4.7%
Vanguard Energy VDE, -0.82% -4.7%
SPDR Oil & Gas Exploration & Production XOP, -0.87% -4.0%
Invesco DWA Energy Momentum PXI, -1.50% -4.0%
Source: FactSet, through close of trading Wednesday, September 16, excluding ETNs and leveraged products
Is there an ETF for that?

If investors think the action of the past week or so signals the beginning of a wave of consolidation, there’s an ETF with ticker tailor-made for that strategy, notes Todd Rosenbluth, head of ETF and mutual fund research for CFRA. MNA, the IQ Merger Arbitrage ETF MNA, -0.52%, takes a long position in companies that have announced they are in the process of being acquired, while shorting the broader market.

That means that the fund, which rebalances monthly, could scoop up Immunomedics. Current holdings include E-Trade Financial ETFC, -1.98%, which is in the process of being acquired by Morgan Stanley MS, -1.93%, and Tiffany & Co. TIF, -0.71%, whose takeover by LVMH may be doomed. Like IBBJ, Rosenbluth said, this is an investing strategy that isn’t guaranteed, but “the benefit of an ETF is that most of these deals get completed, and you spread that risk around.” And it’s worth noting that shares of acquisition targets trade at a slight discount to the offer price.

Top 5 biggest flows gainers of the last week
SPDR S&P 500 ETF Trust SPY, -1.55% $6.52 billion
Vanguard Total Stock Market VTI, -1.55% $2.47 billion
Vanguard Growth VUG, -2.10% $1.81 billion
Vanguard Small-Cap VB, -1.13% $1.76 billion
Vanguard Mid-cap VO, -1.39% $1.71 billion
Source: FactSet, through close of trading Wednesday, September 16, excluding ETNs and leveraged products

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