Breaking Into Brokers

The brokers are coming! The brokers are coming!

It's a big week for the investment banks, with a trio of bulge-bracket firms reporting quarterly results. Considering the slew of IPOs in the second quarter, as well as robust trading volumes in the turbulent month of May, expectations are high for the group.

Investors who want a piece of the action may want to hitch themselves to a broker-focused exchange-traded fund. But given the volatility surrounding the firms' earnings reports, these investors could be in for a bumpy ride.

On Monday, Lehman Brothers(LEH Quote) reported that its second-quarter earnings rose 47% from a year ago, topping estimates on across-the-board revenue growth in investment banking, trading and asset management.

Lehman earned $1 billion, or $1.69 a share, in the quarter, compared with $683 million, or $1.13 a share, a year ago. Second-quarter revenue rose 35% to $4.4 billion. The results beat analysts' average estimates for earnings of $1.61 a share and revenue of $4.2 billion.

Despite Lehman's seemingly stellar second-quarter performance, the stock sold off sharply Monday, falling 5.5% and taking its peers down in sympathy. Goldman Sachs(GS Quote), which will be in the spotlight Tuesday, fell 3.3% after the report, while Bear Stearns(BSC Quote), set to report on Thursday, dropped 3.4%.

Of course, one way for investors seeking to take a position on the brokers -- bullish or bearish -- is by going long or short the individual names. But that's a risky way to play the group, especially during earnings season, when volatility tends to spike.

Instead of placing all your eggs in a single broker's basket, a more diversified way to play the sector is through the streetTracks KBW Capital Markets(KCE Quote) exchange-traded fund.

The KCE was rolled out in November 2005, and tracks the Keefe Bruyette & Woods Capital Markets Index. The ETF currently has more than $50 million in assets and an expense ratio of 35 basis points. As of Friday, the fund is up 6.27% year to date vs. 1.17% for the S&P 500.