What Some Leveraged ETFs Are Saying About Interest Rates

As seasoned investors and traders know, there are some sectors that benefit from higher interest rates and others that do not. Now that the Federal Reserve has put off raising interest rates until at least December, let's look at how a pair of leveraged ETFs have behaved in rate-sensitive sectors: homebuilders and regional banks.

Regional bank ETFs are seen as prime beneficiaries of higher interest rates. Simply put, net interest margins at regional banks have been suppressed by the Fed's zero interest rate policy and reversing that policy is seen as an important catalyst in boosting profits for the banks in these funds.

With that in mind, it might be concerning to regional bank bulls that volume has recently been robust in the Direxion Daily Regional Banks 3X Bear Shares WDRW. WDRW looks to deliver triple the daily inverse returns of the Solactive Regional Bank Index.

What's Up With WDRW?

“The Solactive Regional Bank Index attempts to include the 50 largest regional banks in the United States. The Index utilizes each security’s free-float market capitalization to determine the largest regional banks. Once the 50 largest regional bank securities are determined, the holdings are then equal weighted. As of June 30, 2016 the Index had a median market capitalization of $3.14 billion and an average market capitalization of $4.70 billion,” according to Direxion.

For the five-day period ended September 15, WDRW's average daily volume was more than 83 percent above its trailing 20-day average, according to Direxion data. Only seven of Direxion's leveraged ETFs saw larger volume spikes over the same period.

What could be elevating the rising rate concern is the fact that one of those seven ETFs is the Direxion Daily Homebuilders & Supplies 3X Bear Shares CLAW.

“In a rising rate environment, home affordability is diminished and there is less incentive for renters to purchase a new home. Additionally, the more expensive mortgage rates may scare away current homeowners who are thinking about upgrading to a bigger, more expensive home,” according to ETF Trends. 

CLAW seeks to deliver triple the daily inverse returns of the Dow Jones U.S. Select Home Construction Index. That index “measures U.S companies in the home construction sector that provide a wide range of products and services related to homebuilding, including home construction and producers, sellers and suppliers of building materials, furnishings and fixtures and also home improvement retailers. As of June 30, 2016, the Index was comprised of 40 stocks and the companies included in the Index have a median market capitalization of $2.00 billion and an average market capitalization of $9.41 billion,” according to Direxion. 

For the five days ending Sept. 15, CLAW's volume was nearly 116 percent above the trailing 20-day average, according to issuer data.