For better or worse, the largest investment banks and brokerage
houses in the U.S. are household names. Think Goldman Sachs (NYSE:
), Morgan Stanley (NYSE:
) and friends. However, brand recognition and notoriety for these
firms has not always translated to popularity and inflows for
that focus on capital markets firms.
This year, new regulatory guidelines could lead to a higher cost
of doing businesses for many Wall Street banks and with that in
mind, S&P Capital IQ took a look at two ETFs comprised
primarily of capital markets firms.
"In the year ahead, we see modest revenue gains in investment
banking," said S&P Capital IQ in a research note. "We view
several factors as key determinants of whether there will be
improvement in underwriting and advisory fees. First, we think
there is a positive correlation between equity market appreciation
and IPO activity, boosting private companies' incentive to go
public when valuations are higher. Second, CEO confidence levels
remain near record lows, which is a pretty good barometer for
potential M&A activity. And finally, we view high levels of
cash on corporate balance sheets as additional support for M&A
Should companies decide to put some excess cash to work through
mergers and acquisitions, the iShares Dow Jones U.S. Broker-Dealers
Index Fund (NYSE:
) is one ETF that could benefit. S&P Capital IQ rates that ETF
Overweight. IAI, which has almost $49.1 million in assets under
management, counts Goldman Sachs and Morgan Stanley among its top
two holdings. Those stocks combine for almost 15 percent of the
IAI has gained 17.6 percent in the past year and recently broke
through some stiff resistance at $24. With a P/E of 18.33 and a
price-to-book ratio of 1.57, IAI is a bit more expensive than the
iShares Dow Jones U.S. Financial Sector Index Fund (NYSE:
IAI's beta of 1.57 against the S&P 500
implies a higher degree of volatility compared to some other
financial services ETFs.
S&P Capital IQ also has an Overweight rating on the SPDR
S&P Capital Markets ETF (NYSE:
). Using more of an equal weight approach, KCE is home to 49
holdings, double that of IAI. However, KCE's composition has lead
to vastly different returns over the past year.
For example, Goldman is KCE's largest holding as well, but at a
weight of just 2.82 percent. Still, KCE has surged almost 28
percent in the past year. Other top-10 holdings in KCE include
), Northern Trust (NASDAQ:
) and Charles Schwab (NYSE:
KCE has just $23.1 million in assets under management, but its
expense ratio of 0.35 percent is below the 0.47 percent charged by
For more on ETFs, click
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