Broker/Dealer ETF Takes a Beating

The iShares Dow Jones U.S. Broker-Dealers Fund(IAI Quote) has seen its fair share of adversity this year.

Still struggling to bounce back from the Bear Stearns(BSC Quote) collapse, this ETF is down 22.6% year to date. Since hitting its 52-week low on March 17, the fund has gained 23%, but still remains 32.2% below its 52-week high achieved last June.

IAI's top holdings include names such as Goldman Sachs(GS Quote), Morgan Stanley(MS Quote), Merrill Lynch(MER Quote), Lehman Brothers(LEH Quote) and Charles Schwab(SCHW Quote).

In the wake of massive writedowns, analyst downgrades and the prospects of tightened regulation, the investment banks may still have some pretty steep hurdles left before their stock prices really can begin to recover. However, in the event they are able to successfully clear these barriers, there could prove to be a sizable upside for shareholders.

"Looking ahead, I think these stocks will move forward in fits and starts with periodic jolts to the downside on credit fears," says Herb Morgan, CEO and chief investment officer of Efficient Markets Advisors. "The sector as a whole is relatively undervalued, though."

Ryan Lentell, a senior equity analyst for Morningstar, agrees with Morgan on the notion of choppy waters ahead.

"Long term, investors will do well investing in these banks," he says. "However, they should expect continued volatility in the near term. The issues in the housing and credit markets are not going to disappear overnight, and these concerns will continue to pressure the banks and produce negative headlines."

James Shelton, chief investment officer of Kanaly Trust, also believes that the short term could present a great deal of challenges for the sector.