The financial services sector has had its shares of struggles this year, vexing investors even as interest rates rise and members of the sector report strong earnings. However, the sector has recently perked up and that could be a sign of short-term opportunity with leveraged exchange traded funds, such as the Direxion Daily Financial Bull 3X Shares (NYSEArca: FAS).
FAS seeks to deliver three time the daily performance of the Russell 1000 Financial Services Index. FAS has a bearish counterpart, the Direxion Daily Financial Bear 3X Shares (NYSEArca: FAZ). FAZ attempts to deliver three times the daily inverse performance of the Russell 1000 Financial Services Index.
Earlier this year, financials were also propped up by a rise in bond yields as higher interest rates typically widen the margin spread between bank loans and deposits. The spreads will further widen as the Federal Reserve has stated its intentions to raise interest rates in response to economic growth and rising inflation. Still, earnings season has not been the catalyst some expected for the sector.
Renewed Opportunity For FAS, Others
There are reasons investors have not been enthusiastic about the financial services sector this year.
“The street’s reticence isn’t entirely ill-founded,” said Direxion in a recent note. “This earnings season did come in the wake of a couple major market corrections and also began in the midst of escalating tariff negotiations between the U.S. and China which could spell trouble for borrowers in the agricultural industry. Domestically, there is also the question of whether consumers will be able to afford to borrow as housing prices continue to rise to new heights in the midst of huge demand and credit card charge-offs rise to a six-year high.”
Amid rising Treasury yields, regional bank stocks and ETFs have outperformed money center bank and traditional financial services funds.
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.
The Direxion Daily Regional Banks 3x Bull Shares (NYSEArca: DPST) can capitalize on short-term views on further strength in the financial sector while the Direxion Daily Regional Banks 3x Bear Shares (NYSEArca: WDRW) is a triple-leveraged bearish play on regional banks.
“Earnings results from regional banks like Cullen Frost, Texas Capital, BB & T and Fifth Third Bank have shown a strong trend toward increasing corporate and individual loan accounts, a tactic helped by legislation under consideration that would ease Dodd-Frank lending restrictions and stress tests put in place after the 2008 financial crisis,” according to Direxion. “Many have already anticipated the actual impact of these changes. However, Fifth Third credited its strong Q1 to its efforts in building those accounts.”
For more information on the banking sector, visit our financial category.