Profit On The ETF Boom

The chart below shows the growth of ETFs since 2000.

The most important publicly traded firms for ETFs are Barclays Global Investors (NYSE: - ), State Street (NYSE: - ), Bank of New York (NYSE: - ), and Invesco (NYSE: - ). The chart below compares their performance over a five-year period with the Financial Select Sector SPDR (AMEX: - ).

As the chart above shows, most of these firms are outperforming the financial services benchmark XLF, with Invesco (provider of PowerShares) leading. None of these firms is a pure ETF play (only a tiny portion of their overall revenue is derived directly from ETFs), and the obvious problem with any of them is that ETFs have notoriously thin profit margins.

Barclays has the largest share of the ETF market, by last count $311 billion from 139 ETFs. Barclays offers retail and commercial banking, pension fund management, commercial, leasing, mortgages, and so on. Their stock has come down recently, along with the rest of the foreign money center stocks and the financial sector generally. Its P/E, growth and dividend profile are similar to other large banks. The chart below compares BCS with its peers Citigroup (NYSE: - ) and Deutsche Bank (NYSE: - )

While Barclays' wide focus makes it an unlikely choice for a pure ETF play, its diversity and wealth management platform make it ideal for launching ETF products and continuing to grow market share. Even from its own internal operations, Barclays can ensure that ETFs do not fade into a CEF-type fad.

After Barclays State Street is the next largest ETF player. State Street provides the Standard and Poor's Depositary Receipts (AMEX: - ) and the other SPDR funds, and leads ETF providers by dollar volume. Though it lacks the retail interests of Barclays, State Street is nonetheless diversified and hardly an ETF-only play.

Another key player in the ETF markets is the Bank of New York (NYSE: - ). BK is the service provider for Rydex funds and also provides critical administration, accounting execution, securities lending, and logistical services for ETFs.

Since Invesco acquired PowerShares in January 2006, its stock has doubled. Invesco is an investment manager with almost $500 billion in assets under management. Like Barclays, it is in a good position to develop ETFs through its existing retail, institutional, and private wealth management clients.

The table below compares the P/E, dividend yield and 52-week performance of the key publicly traded ETF players.

The diversity in P/E and yield is a reflection of the distinct business focuses of these firms and the relatively small part that ETFs play in profit generation.

ETF players more narrowly focused on ETFs tend to be privately held, like Claymore and First Funds, or, like WisdomTree, not currently filing financial statements with the SEC. Although WisdomTree (WSDT.PK) has seen a huge appreciation since launching its family of ETFs, we regard any firm trading on the pink sheets as too speculative for serious consideration.

Overall, the formulation of a sub-index of ETF providers and players, while intriguing, remains unfeasible for investors at this time.