People usually make money off the takeover target, which sees its stock price rise far more than the buyer's stock after an announcement, but there's more to this strategy than just purchasing the selling company's stock.  In a stock-for-stock deal, investors have to account for market risk. You don't know exactly where that stock price will end up. So the investor will buy the stock of the target company while shorting the stock of the acquiring company.  If a deal goes through, it's unlikely the short will make the investor any money, but if it goes belly up or closes at a lower price than expected, then it can act as a hedge. In a bust situation, the share price of the target company will fall, but usually the price of the buyer drops, too. The short position will help cover these equity losses.  The merger arbitrage ETF doesn't short a business specifically—it doesn't want to take any company-specific risk—but rather, it buys a short on a sector index or a broader index, like the S&P 500, said Patti.  Read MoreThese hot funds are leaving the S&P in the dust  In an all-cash deal, an investor wouldn't short the buyer's business, as the target price is more certain. They'd just go long on the target stock and hope the deal goes through.  "In this case, the term merger arbitrage is actually a misnomer," said Horan. "There's really no arbitrage. You are speculating the deal will go through, or at least you are implicitly placing a higher probability on it than the market."
Merger arbitrage funds and ETFs are vehicles for investors to get involved in the trillion-dollar boom in corporate M&A. But there are risks.