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Broker Dealer ETF in Focus on Rumored Schwab-Ameritrade Deal

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In a bid to rage zero-fee wars, the largest discount broker in the U.S. financial world Charles Schwab Corp. (SCHW - Free Report) is in talks to acquire TD Ameritrade (AMTD - Free Report) . Per Fox Business, the value of the deal is pegged at $26 billion, at a nearly 18% premium to Ameritrade's market capitalization.

The rumored deal could create a titan in wealth management, while delivering cost and revenue synergies. Analysts see benefits in a Schwab-TD Ameritrade combination. Keefe, Bruyette & Woods believes Schwab is benefiting from higher returns on Ameritrade’s sweep deposits of customer cash balances and making money off Ameritrade customer assets over time (read: Financial ETFs Gain Despite Mixed Earnings).

The deal, still to be formally announced by the companies, would create a new giant with over $5 trillion in combined client assets. A Schwab-Ameritrade merger may face significant antitrust issues. Schwab and TD Ameritrade are among the top three custodians of registered investment advisor (RIA) assets, with Fidelity Investments. Notably, Schwab has about half the market for custodian assets for registered investment advisers and Ameritrade has 15-20% market share, making them the first and the third in the business, respectively. Both the companies are also dominant players in the retail brokerage business.

The buzz came on the back of the race of the brokerage firms going for zero fees on online trade. Schwab and Interactive Brokers (IBKR) announced zero commission trading on stocks & ETFs last month. This was followed by Fidelity, TD Ameritrade E*Trade (ETFC - Free Report) and Ally Invest (read: The Race to Zero: What ETF Investors Need to Know).

Free trading is paying off for Schwab in terms of new client accounts. The company added 142,000 new brokerage accounts in October, up 31% from September and 7% from October 2018. The new accounts brought Schwab’s client assets to a record $3.85 trillion. Schwab has a Zacks Rank #3 (Hold) and VGM Score of B. Its earnings are expected to grow 9.4%, per Zacks.

Market Impact

Following the rumor, shares of Ameritrade surged nearly 17% to close the day and crushed its average volume as nearly 33.9 million shares moved hands compared with 4.3 million, on average. Meanwhile, shares of SCHW were up 7.3% on elevated volume of 42.5 million shares compared to the average daily volume of 8.4 million shares.

The speculation has pushed the broker dealer iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI - Free Report) to new highs (see: all the Financials ETFs here):

IAI in Focus

This fund offers exposure to U.S. investment banks, discount brokerages, and stock exchanges by tracking the Dow Jones U.S. Select Investment Services Index. It holds 25 stocks in its basket with heavy concentration on the top three firms with a combined 45.2% share in the basket. More than 62% of the portfolio is dominated by investment banking & brokerage while financial exchanges & data make up for 37% share.

IAI has amassed $246 million in its asset base while charges 42 bps in annual fees. It trades in average daily volume of 27,000 shares. The product has gained nearly 22% so far this year and has a Zacks ETF Rank #3 (Hold) with a High risk outlook.

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