Analysts have been predicting a spike in mergers and acquisitions (M&A) for almost two years now. With an estimated $2 trillion stashed away in corporate balance sheets, and cheap financing available because of low interest rates, the thinking is that if companies can’t create growth, they can buy it.

Still, M&A activity remains tepid. The number of deals worldwide did climb 16 percent in the first half of 2012, yet the average dollar amount of each deal was only $68 million, down some 33 percent.

This slowdown is largely due to the continuing sovereign-debt crisis in Europe, where banks are hoarding cash in case of a eurozone meltdown. In the US, megadeals have been few and far between as well. Given the wobbly economy, American companies are hesitant to commit resources to big buyouts.

But there are some bright spots for M&A: Private equity companies have been liquidating former investments and raising cash, and those assets will need to be put back to work. And to boost their profitability, major US banks are showing increased willingness to lend (at least to help fund smaller deals), since consumer demand for loans remains weak.

These factors, combined with fairly reasonable company valuations in the wake of this summer’s selloff, mean we might see a pickup in M&A in the second half of this year, particularly if the economic outlook improves.

But investing directly in M&A deals can be risky, since there’s no guarantee that an announced transaction will actually occur. As a result, successful investing in M&A requires a great deal of diversification and the willingness to tie up a chunk of capital.

M&A ETF to the Rescue!

But there is an easier way for the average investor to participate in these deals: IndexIQ Merger Arbitrage ETF (NYSE: MNA) allows you to invest in a basket of M&A deals in exchange for a low annual expense ratio of just 0.76 percent.

With a mandate allowing it to invest around the world, the exchange- traded fund (ETF) buys into companies that are the targets of a takeover after the deal has been publicly announced, and for which there’s a reasonable amount of certainty that the deal will close. In M&A deals, the acquirer usually pays a premium to the prevailing share price, so the fund essentially rides the ascent in the takeover target’s share price.

Additionally, the fund also typically holds short positions in global equity indexes and, on occasion, shorts currencies in order to hedge against general market trends.

Launched in late 2009, the fund’s performance has been fairly lackluster since inception, given the relatively weak M&A environment over that period. However, with conditions favoring at least a modest uptick in M&A down the road, the fund’s performance should pick up.

While a position in IndexIQ Merger Arbitrage ETF is a contrarian bet in the current environment, it has the potential to pay off if the economic outlook improves. In the meantime, since it isn’t constrained by deal size, the fund can continue to invest in the smaller M&A deals that have been the trend as of late.

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