I love when a stock that I own soars in value because an announcement has just been made that it will be acquired by a deep-pocketed new owner. Of course, such situations only occur rarely for individual investors, if they happen at all. I have found one way to increase your odds of benefitting from mergers and acquisitions (M&A) through the purchase of an exchange-traded fund (ETF). The fund that I have identified is the IQ Merger Arbitrage ETF (MNA).

In the wake of a recession, it should come as no surprise that high-profile deals now are occurring. It makes sense because many corporations have been hoarding cash rather than take big risks when the economy was sputtering. With certain industries and regions of the world recovering, opportunities are arising to deploy those funds.

One of the latest attention-grabbing merger deals occurred Sept. 2 when personal computer maker Hewlett-Packard (HPQ) announced that it would purchase data-storage company 3PAR Inc. (PAR) for $33 a share in cash, or an enterprise value of $2.35 billion. That transaction, which forced HP to outbid rival PC manufacturer Dell (DELL), gained approval from the boards of directors at both companies.

Another example was semiconductor behemoth Intel (INTC) bidding $7.67 in cash for security software maker McAfee (MFE). In addition, global mining company BHP Billiton (BHP) floated an unsolicited offer to acquire Canadian agricultural chemical firm Potash Corp. of Saskatchewan (POT).

IQ Merger Arbitrage ETF (MNA) offers an alternative to a hedge fund that aims to provide investors with exposure to the disparities caused in the share prices of companies involved in M&A activity. MNA is intended to let investors reap rewards from corporate M&A deals. Here’s how it works.

The ETF generates capital appreciation for its investors by buying the shares of companies that publicly have become takeover targets for potential acquirers. This strategy, called merger arbitrage, seeks to profit from the price differential between the current trading price of a stock and the price it ultimately trades at upon completion of a merger. MNA’s investment team’s goal is to buy stocks below the final, often higher price of a prospective M&A deal. If the merger closes at or above the target price, MNA profits, along with its investors.

Here’s a snapshot of MNA’s five biggest holdings, as of Sept. 7: cash, 14.41% available to invest for future deals; telecommunications firm Qwest Communications (Q), 8.52%; Potash (POT), 7.75%; McAfee Inc. (MFE), 7.65%; and human resources firm Hewitt Associates (HEW), 7.30%. 

Since the ETF only began operating in November 2009, the merger arbitrage strategy was not easily available to individual investors. Now, the risk takers among you have that option through this innovative ETF.

If you want advice from me about which ETFs to buy and to sell, I encourage you to sign up for my ETF Trader service by clicking here. As always, I am pleased to answer any of your questions about ETFs, so do not hesitate to contact me if you have one. To send your question to me, simply click here. You may just see your question answered in a future ETF Talk.