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Buoyant Bank Outlook, Federal Reserve Support Could Make FAS ETF Great Again

December 22, 2020 7:15 am
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Buoyant Bank Outlook, Federal Reserve Support Could Make FAS ETF Great Again

The Federal Reserve hit bank stocks and the related exchange traded funds on multiple fronts this year, which is to say any examination of the best ETFs in 2020 isn't going to include financial services funds.

What Happened

To end the year, however, things are looking up for the beleaguered financial services, perhaps paving the way for a 2021 renaissance for the Direxion Daily Financial Bull 3X Shares (NYSE:FAS).

As it FAS, which looks to deliver triple the daily returns of the Russell 1000 Financial Services Index, is higher by 14.74% over the past month, indicating the geared ETF is responding to some recently favorable headlines. Those include news out last week that the Fed is allowing Dow component JPMorgan Chase (NYSE:JPM) to resume share buybacks.

Why It's Important

Earlier this year, sensing the economy would weaken due to the COVID-19 pandemic, the Fed told the largest U.S. banks to halt dividend increase plans and buyback schemes. Some, including Capital One (NYSE:COF) and Wells Fargo (NYSE:WFC), lowered their payouts. The gloomy bank dividend picture could be poised to change as soon as early 2021, potentially lifting FAS in the process.

“The Fed eased restrictions on the banks’ shareholder payouts for the first quarter of 2021, specifically by allowing share repurchases that had been suspended since late in first-quarter 2020. Some banks have already announced repurchase programs following publication of the Fed’s results,” according to Moody's Investors Service. “The Fed delayed until 31 March 2021 any decision on whether to alter the stress capital buffers established for the banks following the June results.”

FAS has another catalyst in the form of all that cash banks stockpiled to cover sour loans. Thing is, that situation never got as bad as expected and banks will be able to repatriate that cash back into earnings, providing tailwinds early next year.

What's Next

What makes FAS a compelling 2021 bet for aggressive traders is that domestic banks are well-capitalized and 32 of the 33 subject to the Fed's stress tests surpass the minimum leverage ratios set forth by the central bank.

“The Fed’s stress test evaluates banks’ resilience to different recession scenarios by estimating their earnings, loan-loss provisions and capital levels over nine quarters, from the third quarter of 2020 through the third quarter of 2022,” notes Moody's. “A sizeable increase in loan loss reserves at US banks during the first half of 2020provided them with a larger buffer to absorb the more severe stresses in this round. As a result, the banks’ declines in capitalization under the December scenarios, as measured by the Common Equity Tier 1 (CET1) ratio, were similar to their June results despite the more severe stress.”

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