Broker/Dealer ETF Takes a Beating

"I think they are going to face a difficult second-half of 2008 based on reduced earnings power and the potential for additional losses," he says.

Investors who believe the worst is in the past would be best-served by using the ETF as opposed to trying to pick individual names, Morgan recommends.

"That's really the way to play it... If you are already in the red on any one of IAI's individual holdings, by selling the stock and going with the ETF, you could monetize your loss as well as decrease your risk."

Emiko Kurotsu, an analyst for Morningstar, also favors the use of the ETF, but says it might be too soon to dive back into the sector.

"Given the uncertainty that remains in this segment of the market, we'd recommend investing in a more diversified basket of financial stocks, in order to tamp down volatility," she says. "For a fund like IAI, we would need at least a 20% discount to our fair value estimate before it looks attractive. As of May 20, however, it was only trading at a 16% discount to our fair value estimate, which isn't a big enough margin of safety for our tastes."

Earlier this month, SEC Chairman Christopher Cox called for the SEC or some other financial regulator to be given clear authority to impose better oversight over the industry. Should regulation of this sort eventually come into play, it could prove to be a drag on profits.

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