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.
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.
, which will be in the spotlight Tuesday, fell 3.3% after the report, while
, 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
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
Goldman shares dominate the fund at 10.4% of assets, followed by
at 9.4% and 8.5%, respectively.
Lehman and Bear shares both comprise around 5% of the fund, which owns only 25 stocks. And while the KCE is a more diversified way to own or short the sector, it still can be considered a concentrated fund, with 62.5% of its assets in its top 10 holdings.
The KCE closed down 2.7% Monday after the Lehman report. The decline, while not exactly a strong endorsement for the ETF, is a testament to the benefits of diversification, considering that the individual broker stocks were down by bigger amounts.
Investors looking toward the KCE as a long-term holding, and not just a post-earnings quick flip, may take note of its forward P/E of 14.67 and its yield of 1.1%, according to fund tracker Morningstar. Volume on the KCE averages just under 100,000 shares a day.
Investors looking for broader exposure to the financial sector -- not just the brokers and investment banks -- can opt for financial-sector ETFs such as the
Financial Select Sector SPDR
ETF, which tracks all the financial companies found in the S&P 500. (Financials currently make up just over 20% of the S&P index.) Goldman and Lehman come in at just 2.6% and 1.4% of the XLF, respectively, while mega-bank
makes up 10% of assets.
Other options include the
iShares Dow Jones U.S. Financial Services
fund, as well as the
iShares Dow Jones U.S. Financial Sector
fund. The difference between the two is that the IYG includes just bank and general financial-services stocks, while the IYF also adds real estate and insurance companies such as
to the mix.
Vanguard also offers a financial services ETF, the
Vanguard Financial Viper
, which also is heavy on banks and financial services companies.
Investors solely interested in brokers, however, should strap themselves into the KCE and watch out for those bumps.