One fund comes close to covering the ETF industry.
The growth of the ETF market has been incredible. There are now more 1,500 products in the U.S. alone, and more than $2 trillion invested in ETFs globally. And some believe we’re just beginning to scratch the surface.
That type of explosive growth is extremely hard to come by in this environment where margins sit at historic highs, inventory accumulation explains more than 50 percent of GDP growth, and real income continues to fall.
This rapid growth of the ETF industry goes a long way toward explaining why WisdomTree Investments, an ETF-only fund sponsor, has enjoyed a 150 percent jump in its stock price in the past year, and why BlackRock, the world’s largest ETF issuer, is up 50 percent over the same period.
Given those impressive returns, it may sound nuts to highlight an ETF that owns neither firm, but the iShares U.S. Broker-Dealers ETF (IAI | B-63) is actually a more comprehensive play on the ETF industry. Instead of holding issuers—although there are issuers like Schwab, Goldman and Morgan Stanley in the portfolio—IAI holds a wide range of companies that have a stake in the ETF juggernaut.
| Firm | Weighting |
| INTERCONTINENTALEXCHANGE GROUP | 9.40% |
| GOLDMAN SACHS GROUP INC | 7.22% |
| MORGAN STANLEY | 6.84% |
| SCHWAB (CHARLES) CORP | 6.54% |
| AMERIPRISE FINANCIAL INC | 6.42% |
| CME GROUP INC | 6.30% |
| NASDAQ OMX GROUP /THE | 4.70% |
| RAYMOND JAMES FINANCIAL INC | 4.62% |
| TD AMERITRADE HOLDING CORP | 4.54% |
| E*TRADE FINANCIAL CORP | 4.31% |
| Total | 60.88% |
A quick glance at the fund’s top 10 holding shows the world’s largest exchange operators, massive asset managers and discount brokers. In other words, you have the venues where ETF trading takes place, the firms that fill ETF orders, and the firms at the forefront of the third-party ETF manager revolution.
Look further down the pike and you’ll find liquidity providers for bonds, currencies and ETFs. All of them play a role in bringing an exchange-traded product from the issuer to your brokerage account.
To reframe my point slightly, because there are so many firms that contribute to the incubation and cultivation of ETFs, investors who want broad exposure to the industry need to look beyond the issuers themselves.
For example, owning the exchange where an ETF trades is not enough. You must also own the exchanges where the securities they hold are transacted, whether that’s a futures exchange like the CME, a fixed-income transaction hub like MarketAxess or the platform investors use to access options on ETFs like the CBOE.
All of these market participants interact with each other all day every day—except when the Nasdaq breaks, of course—and all of them are equally valuable cogs in the ETF wheel.
In a world where ETFs are forcing their way into investor consciousness, IAI provides perhaps the only ETF industry play available.
Over the past year, the fund has returned nearly 68 percent, making it the best-performing U.S. financial ETF over that period.
In fact, when compared with the Thomson Reuters US Investment Banking & Investment Services Index—IndexUniverse’s segment benchmark for U.S. banking and investment services—IAI has generated nearly 14 percent of risk-adjusted outperformance.
That type of alpha will likely prove to be an anomaly, but the fund’s exposure is compelling nonetheless.
In a world where everyone says ETFs are the future, it seems IAI is making quite the case for itself.
At the time this article was written, the author held no positions in the security mentioned. Contact Paul Baiocchi at [email protected] or follow him on Twitter at @BaiocchiPaul.
