Exchange ETF: IAI

You will need to look hard to find a consensus outlook on almost any asset class.

Whether you are talking about the U.S. dollar, international equities, high-yield debt, California house prices or the cost of chicken feed – forecasts vary widely.

One predictable outcome of this uncertain environment is that the markets and their exchanges are going to stay busy and that bodes well for their investors. Exchanges such as the CME Group (NYSE: CME), InterContinental Exchange (NYSE: ICE), NYSE Euronext (NYSE: NYX), NYMEX Holdings (NYSE: NMX) and Nasdaq OMX Group (Nasdaq: NDAQ) are all publicly traded.

The exchanges are also available in the form of an ETF – the iShares Dow Jones U.S. Broker-Dealers Index Fund (NYSEArca: IAI).

The bad news is that IAI also includes, as you may have guessed from the name, the major broker-dealers. So if you buy IAI, you’ll not only get CME, ICE and NYSE, you’ll also get Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) as well as Merrill Lynch (NYSE: MER) and Lehman Brothers (NYSE: LEH).

IAI hit bottom after the Bear Stearns collapse in March. Bear Stearns is now gone from the index and from the fund. IAI has since recovered and shows signs of wanting to go higher.


All signs point to the broker-dealers scaling back their proprietary trading activities and getting back to the business of focusing on their clients. The watchout continues to be the riskier names – Merrill and Lehman.

Counterbalancing that concern are observations like the one Warren Buffet made in an interview on CNBC this morning -

I think that what the Fed did, and I think it was proper, what the Fed did with Bear Stearns was a big line in the sand. That changed the game. At that point, the world is looking kind of different in the financial world.

(read the entire interview here).

Another way to look at is this – since Merrill and Lehman are already beaten down, they only make up 13% of the fund. In the unlikely case that both go to zero, you’re only out 13% and the remaining players in the portfolio end up with more market share and more profits.

For more information on IAI, see iShares’ website.

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