The Federal Reserve gave banks the green light to offer more payouts to investors after 18 of the largest financial firms passed the second round of stress tests designed to assess the health of the financial system. For financial sector bulls, this could boost the Direxion Daily Financial Bull 3X ETF (NYSEArca: FAS).
FAS seeks daily investment results worth 300 percent of the daily performance of the Russell 1000 Financial Services Index. The fund invests at least 80 percent 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.
FAS is up 42.56 percent for the year after falling 33.84 percent during 2018. The first quarter saw the fund jump almost 40 percent.
“The results show that these firms and our financial system are resilient in normal times and under stress,” said Randal K. Quarles, the Fed’s vice chairman for supervision.
It wasn’t all unicorns and rainbows for the financial sector as Credit Suisse was the only firm that got tagged with fixes and problems to address prior to October 27. The U.S. division of the Zurich-based firm was found to exhibit weaknesses tied to assumptions the bank made for trading losses under a stress test scenario.
Nonetheless, no banks failed outright, which could give investors confidence in financial sector ETFs.
Other Financial ETFs
Other ETFs in the space that investors can check out are the Financial Select Sector SPDR (NYSEArca: XLF), SPDR S&P Bank ETF (NYSEArca: KBE), and Vanguard Financials ETF (NYSEArca: VFH).
With the capital markets possibly expecting a cut in interest rates, could this affect banks’ lending businesses to the point where they suffer? Some analysts question whether the sector strength can continue through the rest of 2019.
Conversely, bearish traders can look to the Direxion Daily Financial Bear 3X ETF (NYSEArca: FAZ) for an inverse play. For now, however, it appears banks could be in the clear for more gains until rate cuts tangibly affect earnings.
“The stress tests have confirmed that the largest banks are both well capitalized and place a high priority on strong capital planning practices,” Randal Quarles, vice chair for supervision, said in a statement. “The results show that these firms and our financial system are resilient in normal times and under stress.”
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