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Fed Fun For These Bank ETFs

May 28, 2016 6:02 pm
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Spoiler alert: This is article is not about the Financial Select Sector SPDR Fund (NYSE: XLF) or a comparable financial services exchange traded fund. Nor is it about the SPDR KBW Regional Banking (ETF) (NYSE: KRE), at least not directly.

As was noted in this space Thursday, since the publication of the most recent Federal Open Market Committee (FOMC) minutes last week, which revealed the Federal Reserve could very well boost interest rates next month, investors' enthusiasm for regional bank ETFs such as KRE has been tepid.

Related Link: Another Fed Test For Utilities ETFs

Sure, KRE had taken in $26.7 million in new assets for the week ended May 25, but it would be reasonable to expect that number would be higher for an ETF that is as intimately levered to higher interest rates as is KRE. Plus, KRE is the largest ETF tracking rate-sensitive regional banks.

Do not fret, because some regional bank ETFs have recently been seeing increased activity: The leveraged kind of regional bank ETFs.

Leveraged Regional Bank ETFs

Unbeknownst to many investors there are leveraged regional bank ETFs, including the Direxion Daily Regional Banks Bull 3X Shares (NYSE: DPST) and the Direxion Daily Regional Banks Bear 3X Shares (NYSE: WDRW). Based on tickers alone, these ETFs should be easy to remember.

Recent data points suggest someone is paying attention to DPST and WDRW. DPST attempts to deliver triple the daily returns of the Solactive Regional Bank Index, while WDRW seeks to deliver three times the daily inverse returns of that benchmark, so these are not leveraged cousins to KRE. Currently, there is no plain vanilla regional bank ETF listed in New York that tracks the Solactive Regional Bank Index.

For the five days ending May 25, only two Direxion ETFs saw their volume jump above their trailing 20-day average by more than DPST. Over those five days, DPST's volume was more than 129.2 percent above its trailing 20-day average, according to Direxion data.

WDRW's volume increase over that stretch was more modest at just under 46 percent, but only eight Direxion ETFs, including DPST, saw larger volume jumps over that period.

Now this is where things get really interesting. For the 30 days ending May 25, no new money was added to DPST, but WDRW saw average daily inflows of over $526,000. That could either be a sign that some traders are hedging long positions in KRE or that some are overtly betting the Fed will not follow through with an interest rate hike in June.

Disclosure: Todd Shriber owns shares of XLF.

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