It's A Huge Week for Leveraged Bank ETFs

Even with the benefit of three interest rate hikes by the Federal Reserve, moves expected to benefit banking stocks, regional bank equities and the related exchange traded funds are languishing this year. For example, the S&P Regional Banks Select Industry Index (SPSIRBKT) is lower by 4.74% year-to-date.

Predictably, the Direxion Daily Regional Bnks Bull 3X ETF (NYSEArca: DPST), which looks to deliver triple the daily returns of the S&P Regional Banks Select Industry Index, is getting pummeled as stocks in the index struggle.

On the other hand, DPST’s bearish counterpart, the Direxion Daily Regional Bnks Bear 3X ETF (NYSEArca: WDRW), is thriving.

WDRW seeks daily investment results that equate to 300% of the inverse of the daily performance of the S&P Regional Banks Select Industry Index. The fund invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse or short leveraged exposure to the index, which 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.

Big, Imminent Tests

Higher interest rates would help widen the difference between what banks charge on loans and pay on deposits, which would boost earnings for the financial sector. Regional banks are among the stocks most positively correlated to rising interest rates because higher rates improve net interest margins. However, the big tests for DPST and WDRW over the near-term come on the earnings front.