Putting Volatility in Financials to Work in Short-Term Trades

Amid a recent onslaught of earnings reports, the financial services sector has spent plenty of time in the spotlight. Some data points indicate volatility for the group has inched higher as well.

That could spell opportunity with leveraged exchange traded funds, such as the Direxion Daily Financial Bull 3X Shares (NYSEArca: FAS) and the Direxion Daily Financial Bear 3X Shares (NYSEArca: FAZ). FAS tries to deliver triple the daily returns of the Russell 1000 Financial Services Index while the bearish FAZ aims 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.

Opportunity With FAS & FAZ

“First, we had the run-up in rates to almost 3% in mid-February, followed by a fall back to 2.73% in early April. Slowly rising higher rates help banks make a better spread on what they lend versus what they borrow,” said Direxion in a recent note. “But what really roiled the entire market was the talk of tariffs. Obviously, steel and aluminum tariffs don’t directly hit banks, but the concern is that an overall economic slowdown from a trade war will ultimately affect banks. Yet, in the background, there are still rumblings of decreased regulation.”

Related: U.S. Sector ETFs for a Rising Rate Environment

Deregulation could also help the financial sector improve their margins. President Donald Trump has shown its eagerness in cutting back the red tape and remove some of the post-financial crisis regulations that has stifled the industry. The rising interest rate environment is also good for net interest margins for banks and more so for insurance companies.

“The good news is that the forward multiple for the group dropped to 13x from 15.5x in late 2017. Steady earnings and outlooks could help lower the volatility in the group. But the Trump administration’s policies remain a wildcard. Either way, Direxion has you covered with FAS (Daily Financial Bull 3X Shares ETF) and FAZ (Daily Financial Bear 3X Shares ETF),” according to Direxion.

For more information on the financial sector, visit our financial category.