Another Way Brokerages Can Make You Wealthier

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some financial stocks to your portfolio, take a look at brokers and related financial services company and consider the iShares Dow Jones US Broker-Dealers ETF (NYSEMKT: IAI  ) . It 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.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The iShares ETF's expense ratio -- its annual fee -- is a relatively low 0.47%. The fund is fairly small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF has performed, well, poorly, partly due to the recent recession and lower trading volumes. It underperformed the world market over the past three and five years. It's the future that matters most, though, and as with most investments, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why brokerages?
It's good to have a diversified portfolio, and the financial sector is a huge part of our economy. Our massive stock market seems to be here to stay, so brokerages are likely to keep making money off its activities, especially in bullish periods.

More than a handful of brokerages and related companies had strong performances over the past year. E*TRADE Financial (NASDAQ: ETFC  ) , for example, rose 18%, as it works to improve its loan portfolio. My colleague Eric Volkman, though, warns that its picture may be less rosy than it seems. Its expansion into banking services hasn't paid off too well, and other brokerages have been diversifying more successfully.

Other companies didn't do as well last year, but could see their fortunes change in the coming years. Interactive Brokers Group (NASDAQ: IBKR  ) was roughly flat. The low-cost brokerage targets high-frequency traders (vs. less frequently trading, more Foolish, long-term buy-and-holders), many of whom have helped enrich the company by tapping margin loans. In general, though, low interest rates have put pressure on profit margins for the whole industry. Interactive Brokers has also been innovative, inviting customers to participate in and profit from securities lending.

BGC Partners (NASDAQ: BGCP  ) sank 28%, and has been diversifying its business by expanding into commercial real estate. It also offers a huge dividend, recently yielding 11.6%. Some worry about overall low trading volume, but others are encouraged by insider buying at the company and strong employee ownership.

Market-making firm Knight Capital (NYSE: KCG  ) plunged 72%, mostly over the summer, when a "technology breakdown" or "glitch" led to some market mayhem involving 148 companies' stock -- and then led to Knight quickly raising hundreds of millions of dollars in order to stay in business. (Several of my colleagues wrote a well-regarded series on this debacle.) Knight later agreed to merge with Getco. Its recent earnings report was lackluster, suggesting it may not yet be a bargain.

The big picture
Demand for 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.

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