This New ETF Could Be The Perfect Contrarian Trade

This year, few asset classes have been as maligned as European banks. Although it has rallied off its July lows, the MSCI Europe Financials Index is off 14 percent year-to-date and the recent trials and tribulations of German banking giant Deutsche Bank AG DB underscore the fragility of some major European banks.

Said another way, being long European banks and exchange traded funds such as the newly minted Direxion Daily European Financials Bull 2x Shares EUFL, which debuted in late July, is the epitome of a contrarian trade.

EUFL tracks the aforementioned MSCI Europe Financials Index, which “is a free float-adjusted, market capitalization weighted index and represents securities of large capitalization and mid-capitalization companies across developed market countries in Europe. As of June 30, 2016, the Index consisted of 98 constituents with an average market capitalization of $16.16 billion and a median market capitalization of $10.51 billion,” according to Direxion. 

EUFL's underlying index is not a dedicated Eurozone index as U.K. and Swiss banks combine for about 43 percent of its weight. The index's top 10 holdings combine for about 42 percent of its weight. Keep in mind that Switzerland, like the Eurozone, has negative interest rates, a factor that has weighed on banks throughout the region. Still, some analysts see opportunity with beleaguered European banks.

This was followed by Citigroup boldly upgraded  its view of European banks to overweight.

“Citi acknowledged headwinds facing the sector such as pressure on profits from ultra-low interest rates, regulatory costs and potential dilution, but added it saw negative risks as being more on selective, individual banks rather than being system-wide,” according to Reuters. 

The bank itself called the idea contrarian noting that European banks have been among the banking group's worst performers over the past decade.

So risk-tolerant traders with a buy when there is blood in the streets view could see EUFL as the ideal short-term, contrarian idea. Other aspects of this idea include the ability of Germany, almost 12 percent of EUFL's weight, to endure more fallout from Deutsche Bank and how the Eurozone copes with such a scenario because ex-Germany, Eurozone banks account for over 35 percent of EUFL's weight.

EUFL has a bearish counterpart, the Direxion Daily European Financials Bear 1x Shares EUFS.