ETF Investing: An ETF Way To Play A New Wave Of M&A Activity
About: (Abbott Laboratories (ABB), Affiliated Computer Systems (ACS), Disney (DIS), Marvel (MVL), Halliburton (HAL), BJ Services (BJS), Dell (DELL), Perot Systems (PER), Goldman Sachs (GS), Morgan Stanley (MS), SPDR KBW Capital Markets ETF (KCE), Jefferies Group (JEF))
After the rebirth of “Merger Monday” on September 28 that included Abbott Laboratories (ABT) $6.6 billion purchase of Solvay’s pharmaceuticals business and Xerox’s (XRX) $6.4 billion buy of Affiliated Computer Systems (ACS), investors appear to be getting hopeful that a fresh wave of mega-deals is about to wash over the Street. Throw in Disney’s (DIS) purchase of Marvel (MVL), Halliburton’s (HAL) acquisition of BJ Services (BJS) and Dell’s (DELL) of Perot Systems (PER) and September definitely brought an uptick in M&A activity.
But how do retail investors profit from this scenario? The most logical answer would be to own shares of Goldman Sachs (GS), which is typically involved in the biggest deals. Well, not necessarily. Goldman lags rival Morgan Stanley (MS) in M&A advisory in 2009. Not to mention Goldman’s lofty price tag of around $180 a share makes it cost-prohibitive for many retail investors.
That got us interested in the SPDR KBW Capital Markets ETF (KCE). This ETF holds a diverse mix of non-retail bank financial stocks and Goldman Sachs is its largest holding at 9.5% of total assets. Morgan Stanley is the third-largest holding at 8.2% of total assets, meaning KCE is an affordable way for investors to get some Goldman exposure while playing a rebound in M&A activity. KCE also holds Jefferies Group (JEF), a boutique investment bank that actually prospered while its rivals were faltering during the financial crisis.
We’re not going to say that Jefferies should be the biggest holding in your portfolio, but this stock has only recent started to get attention from the so-called smart money, although it has outperformed Morgan Stanley and doesn’t lag Goldman by all that much over the past several months. Make no mistake: Jefferies is a sleeper in the world of M&A advisory and the company and its shares will surely benefit as M&A activity picks up.
KCE seeks to mirror the performance of the KBW Capital Markets Index and the ETF is passively managed, which means expenses and turnover are low. At the end of the day, the Goldman Sachs story cannot be ignored and KCE represents an affordable avenue for average investors to participate in that theme.
