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Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the brokerage and money management industries to prosper as our global economies and stock markets eventually pick up, the iShares Dow Jones US Broker-Dealers ETF (NYSE: IAI ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.
This ETF has not delivered the most impressive performance so far, but it's also very young, with just a few years on the books. It underperformed the S&P 500, on average, over the past three and five years, but these have been years in which the stock market has stalled or sputtered. If you expect the stock market to heat up, brokerages and financial services companies will likely see business improve significantly.
With a low turnover rate of 32%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.
What's in it?
Several broker-dealer stocks performed strongly over the past year. Fixed-income trading platform provider MarketAxess (Nasdaq: MKTX ) surged 50% over the year, but much of that was due not to operational outperformance, but to speculation that the company might be sold, fetching a premium price. Of course, now that the stock has advanced this far, much of any premium may already be baked into its price. And rumors of sellouts don't always prove true, as well.
Other companies didn't do as well but could improve in the years to come. E*TRADE Financial (Nasdaq: ETFC ) shed 52%, dropping more than 10% in a single day after reporting disappointing earnings due largely to loan loss damage. Some expected the company to put itself on the block, but it decided against that. Investment Technology Group (NYSE: ITG ) fell by 40%, due in large part to weak institutional trading. It also announced layoffs and reported disappointing earnings.
BGC Partners (Nasdaq: BGCP ) , down 14%, is one of my colleague Matt Koppenheffer's "5 Hidden Stocks to Save Your Portfolio." You might like it just for its dividend yield above 10% (yes, you read that right), but its CEO has also argued that its small size has kept it from getting into some of the questionable practices that have crushed bigger rivals' stock prices.
The big picture
Demand for brokerages and financial services isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
Remember, too, that even if you don't want to invest in some strong brokerages, you can invest through a great brokerage. Learn more about how to choose the best one for you in our nifty Broker Center.