Bloomberg News

Broker-Dealers Gone Wild? This ETF Is Having a Breakout Year

June 27, 2013


Photograph by Yellow Dog Productions/Getty Images

If Wall Street had a central nervous system, it would be made up of the stocks in the iShares Dow Jones US Broker-Dealers Index Fund (IAI). The exchange-traded fund is having a breakout year, besting the S&P 500 and leading the financial sector with a 30 percent year-to-date return and a 47 percent return in the past 12 months. IAI, which tracks Wall Street banks with significant trading businesses, online brokers and exchanges, is the fourth-best-performing ETF this year. Remove alternative-energy ETFs from the picture and it's the best.

IAI is an ETF for the optimistic. In essence, it's a concentrated bet on a continued economic recovery and on the spark that greater confidence among companies and consumers provides to capital markets. If the economy strengthens from here, its stable of financial stocks will benefit from any pickup in initial public offerings, mergers and acquisitions, trading and asset management.

Four Musketeers

The top four holdings in IAI are all having banner years. The top holding, Goldman Sachs Group, Inc., is up 21.7 percent, while Morgan Stanley, the fourth-largest stake, is up 30.8 percent. Futures exchange operator CME Group is the fund's second-largest holding, and is up almost 35 percent. Charles Schwab Corp., at No. 3, is up more than 43 percent for the year. Together, those four stocks make up 27.5 percent of the fund.

Such performance surges help explain why IAI has almost doubled in size over the past five months. Some $46 million came into the fund, which now has $106 million in assets. While that pales next to the $14 billion in the Financial Select Sector SPDR (XLF), which represents the broad financial sector, breaking the $100 million barrier is a big milestone in an ETF's life. IAI's trading volume has also spiked, going from $6 million traded last December to $44 million in May. It has an expense ratio of 0.47 percent, or $47 in annual fees for every $10,000 invested.

Life hasn’t always been this rosy for the ETF. Looking back five years, it has a -7.8 percent return, largely due to the 2008 financial crisis. That compares to -2.9 percent for the Financial Select Sector SPDR (XLF), which represents the broad financial sector and includes banks, insurance companies and real estate investment trusts. The SP 500 rose 35 percent over the same period.

Wild Ride

Anyone who invests in IAI can expect a wild ride. You can see that by its beta, a measure of how volatile a security or portfolio is compared to the broad market. IAI's beta of 1.2 means that, on average, if the SP 500 goes up 100 percent, IAI will go up 120 percent -- and if the SP 500 goes down 100 percent, IAI will fall 120 percent.

This is why it should probably not be used as a core holding. Instead, it could be used tactically or as a satellite position as part of an overall allocation to the financial sector in an effort to (jargon alert) achieve some “alpha,” which is financial-speak for excess return over a benchmark index such as the SP 500.

Eric Balchunas is an exchange-traded fund analyst for Bloomberg. More ETF data is available here. Bloomberg's ETF podcasts can be found here.

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