The performance of investment brokers has been impressive since the beginning of this year. Over the past six months, the Zacks Investment Brokerage industry has gained 14.5%, outperforming the Finance Sector’s rally of 8.2%.
Heightened market volatility along with a rise in client activity, resulting from uncertainties relating to the coronavirus outbreak in mid-March, has been the main reason for the upbeat performance. Also, the stimulus measures taken by the government to support the U.S. economy in such a crisis resulted in retail investors holding extra cash in hand, which they used to enter the equity markets. Thus, the performance of brokerage industry players has been impressive for the first half of 2020.
Although the pandemic and concerns surrounding its impact on the economy resulted in heightened volatility significantly toward the tail end of the first quarter, it continued into the second quarter, though at a marginally slower pace. And, since client activity in the trading business mainly depends on the prevalent macroeconomic and geopolitical conditions, higher client activity will likely prevail this year due to the continued uncertainties related to the pandemic as well as other factors.
One of the leading brokerage firms in the United States, Charles Schwab SCHW witnessed 42% year-over-year growth in net new assets and a rise of 58% in new brokerage accounts in the first quarter. In the second quarter, net new assets as well as new brokerage accounts improved significantly.
Another brokerage firm, E*TRADE Financial ETFC delivered a stellar performance. In the March-end quarter, its total Daily Average Revenue Trades (“DARTs”) more than doubled on a year-over-year basis and customer accounts were up 8%. In the second quarter, DARTs improved significantly and customer accounts increased 11%.
Interactive Brokers’ IBKR first-quarter DARTs surged 71% and its customer accounts grew 22%. In the second quarter, total DARTs increased significantly and customer accounts grew 36%.
Likewise, TD Ameritrade Holding Corporation AMTD has benefited from higher trading activity, which resulted from investors’ willingness to invest during the pandemic. In the March-end quarter, the company witnessed 13% year-over-year growth in net new client assets, whereas in the June-end quarter, the same increased 11%.
Thus, the solid client assets and brokerage account numbers supported these companies’ financial performance in the said period. Also, the same trend has continued during the first two months of the current quarter, mainly driven by improved trading volumes.
At present, in addition to the fears relating to the second wave of the pandemic hitting some countries, investors in the United States have become wary about the upcoming elections. Further, uncertainty over the amount of time it will take for drug-makers to develop a vaccine to fight COVID-19 is weighing on investors’ minds.
Thus, the above-mentioned concerns are expected to keep the momentum alive and equity markets are anticipated to continue to remain volatile, at least till the end of this year. With heightened volatility, client activity will also likely increase, thus, continuing to benefit brokerage firms.
Despite near-zero interest rates, which will continue to hamper investment brokers’ interest income growth to an extent, they have started to benefit from the commission-free trading that was initiated last year to build client base and hence improve trading income.
Also, with the continued increase in average client asset balances, advisory revenues are expected to keep rising for these industry players. Also, the companies have been undertaking strategic buyouts that are expected to further support profits.
In fact, Charles Schwab’s planned acquisition of TD Ameritrade will create a behemoth in the industry, and is expected to help diversify revenues and be accretive to earnings. The combined firm will likely get substantial benefits and clients of both companies will benefit from the enhancement of “investing and trading experience.”
Amid increasing consolidation within the brokerage industry, E*TRADE Financial is also on track to be acquired by Morgan Stanley MS by the end of this year. Such consolidations are expected to further help these firms diversify revenues.
Thus, given the upbeat outlook for the investment brokerage industry, it seems to be a wise idea to keep an eye on some of the industry players that have been performing well and are fundamentally strong.
Of the companies mentioned above, E*TRADE Financial currently carries a Zacks Rank #3 (Hold), while TD Ameritrade and Interactive Brokers carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Over the past six months, shares of E*TRADE Financial, TD Ameritrade and Interactive Brokers have gained 34.7%, 6% and 8.8%, respectively.
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Interactive Brokers Group, Inc. (IBKR) : Free Stock Analysis Report
ETRADE Financial Corporation (ETFC) : Free Stock Analysis Report
The Charles Schwab Corporation (SCHW) : Free Stock Analysis Report
Morgan Stanley (MS) : Free Stock Analysis Report
TD Ameritrade Holding Corporation (AMTD) : Free Stock Analysis Report
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