Market Overview

Traders Still Like These Leveraged Sector ETFs

Traders Still Like These Leveraged Sector ETFs

It was a mixed first quarter for financial services stocks. The S&P 500 Financial Services Index lost about 1 percent in the first three months of 2018, but regional banks fared better. For example, the S&P Regional Banks Select Industry Index gained almost 3 percent.

The financial services sector, the second-largest sector weight in the S&P 500 behind technology, has been widely viewed as one of the ultimate “Trump trades,” due in large part to the White House's tax reform legislation and its efforts to ease the regulatory burdens facing financial services companies.

“Incredibly, the S&P 500 Financials GICS Level 1 is up over 25 percent since the inauguration,” said Direxion, one of the largest issuers of leveraged and inverse ETFs, in a recent note. nterestingly, the early push in the sector was really tied to the potential repeal of Dodd-Frank and how that repeal could unleash banks’ balance sheets. But even though things didn’t play out that way, financials have roared ahead for at least three other reasons.”

Still Luring Traders

While the broader financial services sector and the related ETFs scuffled in the first quarter, some leveraged funds tracking the sector are still favored among risk-tolerant traders. That includes the Direxion Daily Financial Bull 3X Shares (NYSE: FAS), one of the benchmark leveraged financial services ETFs.

FAS attempts to deliver triple the daily returns of the Russell 1000 Financial Services Index. That index allocates about 45 percent of its combined weight to banks and capital markets firms. Opportunity remains for FAS to be of service for short-term traders as 2018 moves forward.

“Financial stocks are, obviously, sensitive to how well the overall economy behaves, since they grease the wheels,” said Direxion. “The second reason is the tax bill. Most valuations for banks have fallen in the near term, as earnings pop when tax rates come down. The institutions also buy more stock back and pay higher dividends.”

FAS is averaging daily inflows of nearly $5 million over the past month, according to issuer data.

The Rising Rates Play

The S&P Regional Banks Select Industry Index outperformed more diversified financial services benchmarks in the first quarter as interest rates rose. Regional banks are more sensitive to rising rates than their larger, money-center counterparts.

Rising rates should be good news for the Direxion Daily Regional Banks Bull 3X Shares (NYSE:DPST), the king among leveraged regional bank ETFs. DPST attempts to deliver triple the daily returns of the S&P Regional Banks Select Industry Index.

“Financials very much benefit from a rise in interest rates, as they make more money on carry. This last benefit often ultimately becomes a headwind as rates go up and financing slows as well as the mortgage business,” said Direxion.

DPST is averaging daily inflows of almost $275,000 over the past month, according to issuer data.

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