The Financial sector, which had clearly been a laggard to start the year, is slowly picking up momentum. Lackluster activities at household and corporate, high frequency trading concerns, increased regulatory scrutiny and a weak capital markets business dampened the sentiment in the sector.
However, the Financial sector, and in particular broker-dealer companies, are lately seeing increased investor interest. In fact, the iShares U.S. Broker-Dealers ETF (IAI) has clearly been a winner over the past one month, beating not only the overall Financial sector as represented by Financial Select Sector SPDR (XLF), but also outperforming the broader equity market ETF – SPDR S&P 500 (SPY) – by a wide margin. IAI has returned nearly 5% as against 2.3% by XLF and 1% by SPY over the past one month.
What’s Driving IAI Higher?
With the stock markets hitting new highs on various occasions, some kind of sector-rotation seems to be at play. Investors are dumping sectors with lofty valuations in favor of sectors that were previously laggards such as the broker-dealer companies (read: Best ETF Strategies for the Fourth Quarter).
Also, after a lull in July and August, September is seeing increased trading activity which could boost the banks’ third-quarter trading results. Moreover, “Oil, rates and foreign exchange picked up in September from August,” noted Barclay’s analyst Jason Goldberg, which is another positive for broker/dealer companies.
Apart from this, new issues (both debt and equity) have been quite good this year, which have led to increased trading activity. A recovering economy, still accommodative monetary policy and better-than-expected corporate earnings are some of the factors that have supported the U.S. markets in their march upwards and in turn have boosted the confidence of companies to come up with new issues.
In fact, the record initial public offering worth $21.8 billion of Chinese e-commerce giant Alibaba has reinvigorated trading activity.
Moreover, the Fed’s recent statement has moved short- and intermediate-term interest rates higher, leading investors to adjust their trades accordingly, again acting as a catalyst to trading activity. Though the Fed has again vowed to keep interest rates low for a considerable period, it has stated that “it will move sooner if its progress is achieved earlier than expected”.
The above factors have together led to increased industry-wide activity so far this month, working in favor of broker/dealer companies. This has caused the NYSE Broker-Dealer Index to recently break past its six-year high.