Leverage Regional Bank Strength as Fed Continues to Raise Rates

After a 25-basis point hike, the U.S. Federal Reserve could continue raising rates throughout 2022, which puts regional banks at a potential advantage. This is especially the case for regional banks that derive the majority of their revenue from lending products.

“Bank stocks can, of course, enjoy a windfall from higher interest rates,” a Kiplinger article notes. “The bank compensates the depositor at one interest rate, and then lends that money out at a slightly higher interest rate. The difference, or net interest margin, is an important source of revenue.”

There’s a lot of worries regarding the inverting yield curves, which can forecast a recession. However, it could be positive news for traders looking at banks as a potential play.

“Banks generated positive loan growth in each of the 11 periods of (two-year/10-year) curve inversions since 1969,” said Morgan Stanley Research Analyst Betsy Graseck.

A Triple Leverage Opportunity in Regional Banks

Traders looking for opportunities in regional banks can start with the Direxion Daily Regional Banks Bull 3X Shares (DPST). The Fed is expected to continue its rate-hiking campaign throughout the rest of the year as inflation continues to run hot, which should translate to strength for regional bank revenue.

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 fund invests at least 80% of its net assets (plus borrowing for investment purposes) 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 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. Signs of life are starting to show in the fund’s YTD chart with the price moving above its 50-day moving average of late.

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