As Interest Rates Rise, Leverage Financial Sector Strength | ETF Trends

The Federal Reserve has already signaled that it plans to raise rates in 2022, which means opportunities to lever up trades within the financial sector using the Direxion Daily Financial Bull 3X ETF (FAS).

An improving economy means that the Fed is no longer inclined to keep its stimulus measures in place, such as easy money. Rising rates might not be a good thing for consumers, but to the financial sector (banks in particular) that rely on loan products, this could be good for their bottom line.

An improving economy is also causing yields to rise, which doused the equities market with volatility. The financial sector, however, has been able to mute the effects of much of this.

“Increased optimism about the strength of the economy pushed Treasury yields higher following last week’s FOMC meeting. Mortgage rates in response rose across all loan types, with the benchmark 30-year fixed rate reaching its highest level since early July 2021,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting.

FAS seeks daily investment results, before fees and expenses, of 300% of the daily performance of the Russell 1000® Financial Services Index. The fund invests at least 80% of its net assets in financial instruments and securities of the index, ETFs that track the index, and other financial instruments that provide daily leveraged exposure to the index or ETFs that track the index.

The index is a subset of the Russell 1000® Index that measures the performance of the securities classified in the financial services sector of the large-capitalization U.S. equity market. According to Morningstar numbers, the fund is up 90% for the year.

Hot Housing Sector

Rising interest rates, however, mean that mortgage demand could be tamped down, but that should be balanced by a hot housing sector. Prices continue to appreciate, and higher asking prices could translate to bigger loans for purchases to offset falling demand in re-financing activity.

“With home-price appreciation continuing to run hot, increasing more than 19 percent annually in July, applications for larger loan amounts continue to outpace lower-balance loans. The average loan size for a purchase application reached $410,000, its highest level since May 2021,” Kan said.

Nonetheless, for bears who might sense weakness, there’s the Direxion Daily Financial Bear 3X ETF (FAZ). Taking the opposite side of FAS, FAZ seeks daily investment results that equate to 300% of the inverse (or opposite) of the daily performance of the Russell 1000® Financial Services Index.

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