Wall Street's Middlemen: Why Capital Markets ETFs Are Winning in the M&A Boom

Investors seeking to gauge the health of the economy and the extent of elevated risk appetite would do well to monitor mergers and acquisitions (M&A) activity. Fortunately, the outlook is encouraging.

With declining interest rates in the U.S. and other parts of the world, global consolidation activity surged 40% last year, and the number of $10 billion-plus transactions hit a record 60. Supported by the artificial intelligence (AI) build-out, expectations of declining interest rates in the U.S., strong corporate balance sheets, and rising appetite, M&A activity is expected to trend higher this year.

If mergers and acquisitions activity surges this year, this ETF could be a winner. Image source: Getty Images

Investors can profit from that trend not just by buying shares of companies that are takeover targets, but also by investing in the firms that broker the deals. Enter the State Street SPDR S&P Capital Markets ETF (NYSEMKT: KCE), an exchange-traded fund (ETF) that provides broad exposure to financial services outside the traditional banking and insurance realms.

Getting to know KCE

This $485 million ETF, which turned 20 years old last November, isn't a pure-play investment bank fund. Still, it allocates 31.3% of its weight to stocks classified as brokerage houses or investment banks, suggesting it could benefit from increased corporate transactions, including mergers and acquisitions, initial public offerings (IPOs), and spinoffs.

How this ETF delivers exposure to those trends is material to investors. Its 65 holdings aren't weighted by market capitalization. In fact, none of those stocks carry a weight of more than 2.4%, meaning big-name investment banks such as Goldman Sachs and Morgan Stanley don't dominate this ETF's lineup as some investors might expect.

Still, this ETF has ample M&A credibility because, in addition to the aforementioned Wall Street giants, the fund features exposure to several investment banks with the middle-market and "boutique" labels, including Jefferies and Lazard.

Then there's private equity. With trillions of dollars in "dry powder" and increasing appetite for larger deals, it's likely that private equity firms, several of which reside in this SPDR ETF, will figure prominently in the 2026 consolidation cycle. Put it all together, and it's clear this fund has multiple ways of capitalizing on an uptick in M&A activity, some of which may be underrepresented in traditional financial services ETFs.

Covering several sectors

For investors pondering other growth drivers for this ETF beyond corporate transactions, the ETF industry merits a place in the conversation. The reason is simple. Roughly a dozen of the fund's holdings are asset managers that rank among the largest ETF issuers in the U.S.

Several other components of this fund are index providers, such as MSCI and S&P Global, that ETF issuers rely on for passive product benchmarks. Those are points to consider at a time when there's nearly $14 trillion in U.S. ETF assets under management, a figure that seems to grow each month.

This all-access pass to rising M&A activity and the growth of the ETF industry charges 0.35% per year, or $35 on a $10,000 position.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group, Jefferies Financial Group, MSCI, and S&P Global. The Motley Fool has a disclosure policy.