Capital Markets ETFs: Invest in the Financial Recovery with Reduced Risk

Looking to invest in the capital markets but wary about putting all of your wealth into a couple individual stocks? ETFs that include broker-dealers and related sectors is one way to get in on the financial sector with reduced risk.

Instead of picking individual stocks, an investor may consider iShares Dow Jones U.S. Broker-Dealers (NYSEArca: IAI) for exposure to brokers, exchanges and other capital-market facilitators, writes John Spence for The Wall Street Journal. IAI’s main competitor is SPDR KBW Capital Markets (NYSEArca: KCE), which also provides a similar exposure to the sector.

Potential investors should note that firms included in the ETFs are highly dependent on, or correlated with, the broader capital markets.

Brad Hintz of Bernstein Research has said that large-cap broker-dealers are still cheap based on historical valuations. Hintz, however, warns that reduced leverage and low near-term profitability may dampen earnings growth.

No matter how high the financial sector has pulled out, the capital markets are still heavily reliant on government support. The Central Bank has kept rates at near zero to avoid a dip in recovery.

October is a notoriously poor month for stocks and bears are readying for an overdue market selloff. Whether this happens remains to be seen. Potential increased regulation in the financial sector will also create uncertainty for investors. Meanwhile, Barclays Capital has claimed improvements in liquidity has encouraged risk-taking and contributes to the market rallies.

If you’re considering investing in capital markets, have a stop loss in place.

• iShares Dow Jones US Broker-Dealers (NYSEArca: IAI): up 44.3% year-to-date; expense ratio of 0.48%

• SPDR KBW Capital Markets (NYSEArca: KCE): up 43.6% year-to-date; expense ratio of 0.35%

Max Chen contributed to this article.