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Why IAI Is a Great Financial ETF

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The financial sector has rebounded nicely and has been the star performer so far this year. Much of the space has benefited from the steepening yield curve and the move towards cyclical sectors from the defensive ones of late (read: 3 Sector ETFs to Profit from Rising Rates).

With an improving labor market, a recovering U.S. economy and increasing consumer confidence, the capital market is sure to benefit from the positive sentiment. According to the Zacks estimates, the finance sector earnings are expected to increase 19.1% on an annual basis during the second quarter. Further, while the revisions trend for the S&P 500 as a whole continues to be neutral, the finance sector revision trend has been positive.

Some players forecast even bigger gains from the sector, in particular from life insurers and e-broker companies. These stocks would be the major beneficiaries in this environment in the U.S. financial sector, and provide the best returns to investors going forward.

Given these solid fundamentals, the first half of 2013 has been very profitable for the iShares Dow Jones US Broker-Dealers ETF (IAI). The fund has been the fourth best performing unleveraged ETF this year with 34% year-to-date returns and over 51% returns in the trailing one-year period (read: Top ETFs of the First Half of the Year).

In fact, IAI is leading the financial space and has clearly beaten out the broader S&P Financial Select Sector SPDR Fund (XLF - Free Report) and SPDR S&P 500 (SPY - Free Report) by wide margins. And with some of the market factors that caused this jump still in place, this ETF could be a solid pick for those seeking continued outperformance in financials.

Behind The Surge

The ETF seeks to match the performance of the Dow Jones U.S. Select Investment Services Index, before fees and expenses. The benchmark tracks companies in the investment services sector, a sub-sector within the broader financial sector of the U.S economy.

IAI employs a representative sampling technique to include stocks in its portfolio. The product holds 22 securities and is concentrated in its top 10 holdings in which it invests around 59% of total assets (see more in the Zacks ETF Center).

The fund got a nice boost from solid performances by its top four holdings – Goldman Sachs (GS - Free Report) , Schwab Charles (SCHW - Free Report) , CME Group (CME - Free Report) and Morgan Stanley (MS - Free Report) . In the year-to-date timeframe, GS and MS gained nearly 21% and 30%, respectively, while SCHW and CME surged more than 54% and 52%, respectively. Together, these four stocks make up for 27% of the total assets in the fund’s portfolio.

The ETF has a nice mixture of various cap levels with 42% going to large cap, 28% to mid cap, and the rest to small/micro caps. It has a certain tilt toward value securities, which tend to be less volatile (standard deviation of 22.67%) while offering price appreciation.

The product has accumulated nearly $60 million in assets over the last five months, doubling its size to over $129.22 million. It charges investors a relatively high fee of 45 bps, though the daily volume is relatively good at roughly 90,000 shares a day, suggesting that investors have to pay just a bit extra in terms of a wide bid/ask spread (read: 3 Surging Financial ETFs Beating the Market).

Further, IAI pays out a good yield of 1.97% per annum. The prospect of increasing dividends and buybacks calls for a bullish outlook for the ETF. Financials have accounted for the largest increase in dividends in the last three years. This year has already seen dividend/buyback increases by finance companies following approval from the Fed after passing stress tests.           

Bottom Line

The ETF could be a lucrative pick if the economy continues to improve. The ETF remains well positioned thanks to its focus on asset managers and exchanges, two segments which are among the biggest winners from the current market environment (read: 3 Top Ranked Financial ETFs to Buy Now).

Currently, IAI has a Zacks ETF Rank of 2 or ‘Buy’, along with a Medium risk outlook, so we are expecting good things to continue for this ETF as we get further into the second half of the year.

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