With Volatility In The Market, Buy These 2 Exchange Stocks

As global zero-interest rates come to an end, nearly half a decade of suppressed volatility will soon be coming along with it.  The first sign was around last year in May of 2013 when the Federal Reserve announced it would begin tapering back its $70 billion per month in bond and mortgage backed securities. 

Just today, the International Monetary Fund (IMF) downgraded its global GDP growth rate from 3.4% to 3.3% and 4% to 3.8% next year and the markets are not responding well and the major indices are selling off in today’s trading.

In headline news recently, PIMCO’s legendary bond investor, Bill Gross shocked the bond market where leadership change in a $2 trillion asset manager triggered strong market reaction. The market is expecting to see much volatility when interest rates are expected to be raised by early to mid-next year when Fed fund rates are between .50% - .75%.

Investors generally tend to use anything above 20% as a benchmark of higher volatility and below 20% as low volatility based on the CBOE volatility index (CVIX). The VIX has gained about 28% in the past two weeks and investors should be worrying about certain risk metrics whether it is geopolitical, monetary policy, war.


 
As the market has arguably not fully accounted for the upcoming volatility, both from the Fed and recent market activity, investors are going to be positioned with key entry and exit points of volatility as soon as this zero-interest rate period comes to a close.  

As volatility is an inventible factor in the coming months, investors should be looking to invest in exchanges that will capitalize on the heightened volatility with more trades taking place. Below, we profile two publicly traded exchange companies which look to benefit from this and could be interesting picks for investors in this uncertain market climate:   

Intercontinental Exchange Inc. (NYSE:ICE)

Intercontinental Exchange, Inc. operates a network of regulated exchanges and clearing houses for financial and commodity markets in the United States, the United Kingdom, Continental Europe, and Canada. 

The company operates 11 global exchanges and gives central clearing houses, consisting of ICE futures exchanges, NYSE Liffe futures exchanges, New York Stock Exchange, NYSE Arca, NYSE MKT, the Euronext group of stock exchanges, 2 U.S. equity options exchanges, and the Singapore Mercantile Exchange

For those investors who do not already know, exchanges such as the NYSE and other exchanges generate cash by fees.  For example, the NYSE charges $250,000 per year for each company that wants to be listed on the exchange, and traders pay a fee per 100 shares.

As of June 30, 2014 ICE totaled $68.42 billion in assets and $2.057 billion in cash and cash equivalents. For the six months ending June 30, 2014 the exchange generated about $2.071 billion before fees and a net income of 509 million.  This was about a 214% and 73% jump since same time last year respectively.

As of June 20, 2014, the company logged a total debt of $3.931 billion and for the most recent quarter, had a Total Debt/Equity ratio of 29.03.


 
During the third quarter of 2014, the exchange repurchased 1.8 million shares of common stock on the open market and currently has $450 million remaining for availability for stock repurchases under their current program.

We currently rank the stock as a Zacks Rank #3 (hold).  The stock has beat consensus earnings estimates by an average surprise of 4.04% in the past year and is projected to report earnings at $2.01 per share. The majority of analysts have upgraded their earnings estimates for the current quarter up until next year.

CME Group (NASDAQ:CME)

CME Group Inc., through its subsidiaries, operates contract markets for the trading of futures and options on futures contracts worldwide. It offers a range of products for trading and/or clearing across various asset classes, based on interest rates, equity indexes, foreign exchange, energy, agricultural commodities, metals, weather, and real estate.

As of June 30, 2014 The CME totaled about $51.611 billion and assets and about $1.037 billion in cash and cash equivalents.  As of June 30, 2014, the company reported total revenues at $731.6 million and net income at $263.8 million, down about 10% and 15% respectively from same time last year.

The stock has returned about 13% in the past two months and about 42% in the past two years indicating strong value for shareholders.   The current market cap of the CME is valued at $27.20 billion and currently the company has a debt/equity ratio of 9.82.



Increase in volume

CME Group Volume Averaged 15.3 Million Contracts per Day in September 2014, Up 17 Percent from September 2013, and Included Double-Digit Growth in Foreign Exchange, Interest Rate and Agricultural Commodities Volumes.

- Open interest reached record level of 108.4 million contracts
- Foreign exchange (FX) average daily volume rose 39 percent
- Interest rate average daily volume rose 23 percent
- Agricultural commodities average daily volume rose 13 percent
- Options average daily volume increased 29 percent, to record 3.1 million contracts
- OTC interest rate swaps hit record $178 billion in average daily notional value cleared
- Third-quarter 2014 volume averaged 13.5 million contracts per day, up 12 percent from third-quarter 2013

Bottom Line

With volatility expected to increase by the end of the year indicated from the 27% increase in the VIX in the past two weeks.   These two exchanges are positioning themselves to handle the increase in volatility by taking proper precaution to handle all of the volume.  With the Intercontinental Exchange operating subsidiaries such as the widely traded exchange of the NYSE, investors would have the best coverage on daily equities return from increased volume from volatility. 

On the other hand, the CME being the premier exchange for futures and options, an investment in the CME would give investors good exposure on return from traders increasing volume to take precaution for the future.

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