Event-Driven ETFs

Event-driven investing strategies have been around for decades. These strategies attempt to profit from market inefficiencies that often occur in conjunction with various corporate events such as mergers, acquisitions, spin-offs, stock splits, buybacks, IPOs, insider buying, and other activities that are neither fundamental nor technical in nature.

ETFs targeting these strategies often receive a smart-beta classification automatically, because their security selection is not based on sector, geography, or asset class, and their holdings are usually weighted by something other than market capitalization. Here are some examples:

  • Mergers and Acquisitions (“M&A”): M&A funds typically employ an arbitrage strategy of buying the firm being acquired and short-selling the acquiring company. The IQ Merger Arbitrage (MNA) is currently the best representative in the ETF space.
  • Buybacks: Companies often buy their own stock when they believe it is value priced. Additionally, earnings per share and other metrics can increase due to the removal of shares from the market. PowerShares Buyback Achievers (PKW) is a good example.
  • IPOs: I’m sure you seen countless stories about stocks zooming in value on the first day of their initial public offering (“IPO”). Unfortunately, funds like the First Trust US IPO Index ETF (FPX) do not capture those big first-day pops. Instead, they buy these new stocks shortly after their IPO with the hopes that they will continue to rise.
  • Spin-Offs: Oftentimes a company that is spun off from its parent is able to improve its profits due to having a more focused objective and less corporate constraints. The Guggenheim Spin-Off (CSD) holds U.S. stocks that were spun off in the last four years.
  • Insider Buying: When corporate insiders alter their usual buying and selling patterns of company stock, it can often provide insight regarding future profitability. The Direxion All Cap Insider Sentiment ETF (KNOW) attempts to exploit these events.
  • Stock Splits: Back in the 1990s, any company splitting its stock was nearly guaranteed to move higher. That strategy hasn’t paid off in more recent years, perhaps due to a dearth of splits, or perhaps because investors started to realize splits were nothing more than an accounting gimmick. If the strategy proves to be profitable again, then the Stock Split Index ETF (TOFR) could work for you.
  • Multi-Event: I am not aware of any ETFs that currently try to include a wide range of events, but the IQ Hedge Event-Driven Tracker (QED) attempts to replicate an index of event-driven hedge funds. Please note that this ETF does not use any of the event-driven strategies outlined above. Instead, it attempts to replicate the risk-adjusted characteristics of a hedge fund index by investing in various combinations of stock and bond ETFs.

When it comes to classification, some ETFs fall into a gray area. For example, there are many investment strategies based on analyzing 13F filings, which are the quarterly holdings disclosures of institutional money managers. These ETFs attempt to replicate the top holdings of various investors such as hedge fund managers via Global X Guru (GURU), investment billionaires via Direxion iBillionaire (IBLN), and activist investors via Global X Guru Activist (ACTX). These are based on investor events instead of corporate events, although the 13F filing is probably a corporate event. Anyway, these types of funds are usually classified as theme-based or strategy-driven ETFs.

All of these ETFs were created because they were believed to represent good long-term investment strategies. Sometimes that is true, and sometimes it is not. However, even if the long-term results are great, keep in mind that they will all go through extended periods of outperformance and underperformance, so be sure to define your selling criteria before you execute your purchase order. Then, when you do buy or sell, be sure to use a limit order because many of these ETFs are lightly traded.

Despite the huge market advance of the past week, it was not a case of a rising tide lifting all ships. The Financials sector was the big winner, and while it was already ranked at the top, it is dominating the field this week. Within the Financials sector, stocks in the banking industry have been posting the largest gains. Industrials climbed a notch to take over the #2 spot, with transportation, defense, and aerospace all making significant contributions. Materials also moved a step higher, driven by copper, steel, and coal mining as opposed to precious metals. Energy’s two-step climb to fourth puts the “smokestack” trio of Industrials, Materials, and Energy firmly in the upper tier. Meanwhile, the defensive sectors of Consumer Staples and Utilities went the other direction. Not only did they fall in the relative strength rankings, they also declined in value. Technology and Real Estate also lost value. Technology dropped four places to sixth, but Real Estate was already on the bottom of the rankings, unable to fall any further. Health Care made a three-step move upward on huge gains among biotech stocks, but it fell short of flipping from red to green.

The factor rankings are topsy-turvy relative to a week ago. The primary exception is High Beta, and while it does remains on top, its momentum is showing a significant boost from last week. Five factors moved from negative to positive trends led by the impressive surge of Size from last place to second place as small-cap stocks rallied strongly. Value remains a solid contender, although it slipped from second to third. The four other categories moving into positive trends were Fundamental, Market Cap, Dividend Growth, and Quality. Dividend Growth improved its ranking by two spots while the other three all slipped lower due to the huge move by Size. Momentum and Low Volatility lost ground for the week, with Momentum dropping from sixth to last in the rankings.

The global rankings are also a hot mess compared to what they looked like a week ago. Unlike the sector and factor rankings, where many categories showed improvement, the U.S. is the only real beneficiary among the global segments. The U.S. zoomed from ninth to first, a remarkable feat precipitated by a presidential election that caught the world off guard. This accomplishment was accompanied by strength in the dollar, which put all other currencies and their home stock markets at a disadvantage. World Equity, thanks to its 52% domestic equity weighting, rode the U.S.’s coattails five places higher. All other categories lost momentum, although Japan was able to hold steadfastly to second place. The big loser was Latin America. A week ago, it had a solid lock on first place with a momentum score of 43 and a 37-point margin over second-place Japan. This past week, it reversed strongly to the downside, plunging to 10th, and making 64 momentum points vanish. It was a clear victim of the U.S. election results. The damage was not confined to Latin America, as all developing markets felt the pain. China dropped five spots, and Emerging Markets sunk from third to last.


The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.

“No one strategy is correct all the time.”

—John Paulson, event-driven hedge fund manager

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