Summertime Blues for Broker Dealers ETFs

ETF Trends

With second-quarter earnings reports rolling in from the financial services sector, a prominent theme is emerging from the largest U.S. broker-dealers and investment banks: Slack volume is hampering trading revenue.

A slow grind higher during a bull market, the scenario currently at play, favors investors with longer time horizons, but that can be agonizing for traders that thrive on robust activity and some semblance of volatility. Trading has been continually slowing down since the sharp uptick after the financial crisis in 2009. Last year, daily average U.S. stock trading volume was down 37%. [Low Trading Activity Weighs on These ETFs]

“In the second quarter, equity trading volumes fell more than 8% to an average of 6.03 billion shares a day,” reports San Strumpf for the Wall Street Journal.

The iShares US Broker-Dealers ETF (IAI) fell 2.8% during the second quarter while the SPDR S&P Capital Markets ETF (KCE) lost half a percent.

This week, Dow components Goldman Sachs (GS) and J.P. Morgan Chase (JPM) reported second-quarter declines in equities trading revenue. Goldman is IAI’s largest holding at 9.7%. KCE uses more of an equal-weight approach with larger exposure to asset managers and custody banks, but Goldman accounts for 2.9% of that ETF’s weight.

Both ETF’s are trading slightly lower Thursday even after Morgan Stanley said sales and trading revenue were flat in the prior quarter, according to the Journal. Flat is pretty good compared to Morgan Stanley’s rivals. However, while the stock is IAI’s second-largest holding at a weight of 8.6%, the ETF is lower today.

Making the near-term outlook for broker-dealers stocks and ETFs murkier is the expectation of further trading activity declines in the current quarter. Conventional wisdom says if things were boring on Wall Street in May or June, July and August could bring a painful lack of excitement. That lack of excitement could translate to more declines in trading revenue of IAI and KCE constituents. [King of Wall Street ETFs]

IAI is already acting as though the current quarter will be a tough one. The ETF is down 2% since the start of July.

iShares US Broker-Dealers ETF

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ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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