ETFs to Note as Hedge Funds Trim Short Bets on Regional Banks

Hedge funds could be sensing that regional banks could be making a move to the upside. These funds started to trim their bets on shorting those banks, which is a potential sign that rate hikes could be dissipating.

As rates have been rising, this has been affecting the bottom line for regional banks since increased borrowing costs mean consumers are less apt to consider lending products. However, that tide could be shifting if the U.S. Federal Reserve starts to loosen their grip on monetary policy.

More importantly, the outlook for regional banks is improving after the banking crisis earlier this year scared off investors. As Reuters noted, using the iShares U.S. Regional Banks ETF (IAT) as gauge for regional bank performance, the fund has been steadily trending higher since bottoming out in May.

“Hedge funds ditched short bets against U.S. regional banks as of the end of August and turned bullish on the broader U.S. financial sector, according to a Goldman Sachs note, just as bank stock prices began to rise,” Reuters reported. “U.S. financial services companies including banks, trading firms and those working in capital markets were among the most sought-after stocks in the week ended Sept. 1, according to the note by Goldman’s prime brokerage desk, which serves hedge funds.”

Reuters Graphics
Reuters Graphics

Going Long on Financials

Now that the fallout from the banking crisis earlier this year is fading into the background, traders could go long on those banks using the Direxion Daily Regional Banks Bull 3X Shares (DPST). This could go even further once the Fed signals that it’s finally nearing the end of its rate-hiking, which should boost demand for lending products.

As for the fund, DPST seeks daily investment results equal to 300% of the daily performance of the S&P Regional Banks Select Industry Index. The index is a modified equal-weighted index that is designed to measure performance of the stocks comprising the S&P Total Market Index that are classified in the GICS regional banks sub-industry.

For an even broader play on the financial sector in general, consider the Direxion Daily Financial Bull 3X ETF (FAS). FAS seeks 300% of the daily performance of the Russell 1000® Financial Services Index, which is essentially 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.

For more news, information, and strategy, visit the Leveraged & Inverse Channel.