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Some of the best ETFs to buy in 2015 help investors get a piece of a very lucrative trend: mergers and acquisitions.
At the current pace, M&A activity is on track to exceed $3.7 trillion in 2015. That would make this year the second biggest for deal-making since 2007. A total $4.3 trillion in deals was inked that year.
Deals announced so far this year are both numerous and hefty in size. Fifteen of this year's deals carry a price tag of more than $10 billion. That's the highest on record, Dealogic reports.
Last Wednesday brought two deals worth some $100 billion. Royal Dutch Shell Plc. (NYSE ADR: RGS.A) announced it will buy BG Group Plc. (LON: BG) for $70 billion. And Mylan NV (Nasdaq: MYL) courted Perrigo Co. Plc. (Nasdaq: PGRO) with a $29 billion proposal.
These latest deals further stoked hopes that more transactions are on the horizon.
It's never wise to buy a stock purely based on takeover speculation. But dedicating a small allocation to this strategy affords a way to play merger mania with less risk. And ETFs offer a great way to do so.
Following are two of the best ETFs to buy to get exposure to the lucrative M&A market. Both ETFs have bested the year-to-date gains for the Dow Jones Industrial Average (1.6%) and S&P 500 (2.24%) - one by a wide margin.
Best ETFs to Buy to Profit from M&A Activity
Best ETFs to Buy, No. 1: The IQ Merger Arbitrage ETF (NYSE Arca: MNA) covers takeover targets worldwide.
The fund's goal is to achieve capital appreciation by investing in global companies for which there has been a public announcement of a takeover by an acquirer. The approach is based on a passive strategy of owning certain announced takeover targets. The aim is to generate returns representative of global merger arbitrage activity.
MNA also includes short exposure to global equities as a partial equity market hedge.
The fund's one-, three-, and five-year returns are 6.79%, 11.99%, and 10.71% respectively. Its year-to-date return is 3.73%.
This next ETF is crushing the broader market in 2015...
Best ETF to Buy No. 2: The SPDR S&P Pharmaceuticals (NYSE Arca: XPH) ETF is composed of some of the top pharmaceutical companies on the market and several aggressive small caps.
Money Morning Tech Specialist Michael A. Robinson recommends the fund as a way to profit from the ongoing surge in healthcare M&A activity. For Q1 2015, healthcare M&A totaled $104.9 billion, according to Health Care M&A News.
"XPH is not an M&A fund - but it's a great way to take advantage of the trend," Robinson said. "Many companies in the fund's portfolio will likely end up growing through mergers. Or they could become targets themselves."
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The ETF has 36 holdings, including Actavis Plc. (NYSE: ACT), Jazz Pharmaceuticals Plc. (Nasdaq: JAZZ), Eli Lilly & Co. (NYSE: LLY), and Merck & Co. Inc. (NYSE: MRK). The average market cap is $36 billion.
XPH is up 19.47% year to date. Since the start of 2014, the fund has gained 47.5%. That compares to just 8.3% for the Dow Jones and 13% for the S&P 500 during the same time period.
"The beauty of a play like this one is that rather than try to pick a single winner, we get the benefit of the entire sector's operations," Robinson said. "That makes XPH an excellent foundational investment to pave your road to wealth."
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- The Wall Street Journal: Rising Optimism Fuels Deal Rebound
- Business Wire: Health Care M&A Deal Volume in Q1 2015 Surpasses Q4 2014, According to Health Care M&A News