As big banks continue to report their second-quarter earnings this week, some are already expressing concern with respect to the possibility of rate cuts by the Federal Reserve through 2019. In particular, profits could shrink as a result of lower interest rates, which could put the Direxion Daily Financial Bear 3X ETF (NYSEArca: FAZ) in play.
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. 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 equal to at least 80% of the fund’s net assets. 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.
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–something bears will keep an eye on with FAZ in mind.
“The range of outcomes are incredibly broad in terms of the number of rate cuts, and if those rate cuts end up being insurance cuts that ultimately sustain the expansion or whether they end up being in response to real economic slowdown,” said JP Morgan’s chief financial officer Jennifer Piepszak.
On the other side of the trade, 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.
Other ETFs in the financial 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).
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