Banking on Broker-Dealers ETFs

Financial services exchange traded funds have endured some struggles this year, but ETFs such as the Financial Select Sector SPDR (NYSEArca: XLF) look poised to end 2014 in fine form. Since the start of the fourth quarter, XLF, the largest financial services, has gained 8.4%.

Broker-dealers and investment banking stocks have been important drivers of the financial services sector’s recent bullishness. Just look at the iShares US Broker-Dealers ETF (NYSEArca: IAI), an ETF that is up nearly 9% since the start of the current quarter. [Robust Trading Activity Lifts Broker-Dealers ETF]

On heavy volume, IAI rose to its highest levels since the early second quarter of 20078 last Friday, indicating the ETF is breaking out and that more gains could be on the way. Importantly, the $271.8 million ETF’s relative strength is improving and breaking out relative to the S&P 500, according to Captain John Charts.

“TD Ameritrade is showing upside potential breaking out of a head and shoulder continuation pattern. Charles Schwab (NYSE: SCHW) has a trend line breakout, while Morgan Stanley (NYSE: MS) is out of a cup and handle pattern. Stifel Financial (NYSE: SF follow through out of the Parallel Channel looks good here,” notes Captain John.

Morgan Stanley, Stifel Financial and TD Ameritrade are all up more than 6% over the past month while shares of Charles Schwab are higher by 4.1%. Those stocks combine for a quarter of IAI’s weight.

Bolstering the bullish thesis on IAI is Goldman Sachs (NYSE: GS), the ETF’s largest holding. Shares of the largest U.S. investment bank rose nearly 4% last week and that stock is showing signs of its own breakout. Goldman is 9.5% of IAI’s weight, or 80 basis points more than the ETF allocates to Morgan Stanely, its second-largest holding.