The Financials Trade Playing Out In Leveraged ETFs

Third-quarter earnings season is here, and as is the case with every earnings season, the financial services sector got things started. And get things started, they did. 

Nearly every major bank, specifically Goldman Sachs, Inc GS, JP Morgan Chase & Co. JPM, and Bank Of America Corp. BAC beat The Street's expectations on both earnings per share and revenue. The only exceptions were Wells Fargo & Co WFC, which missed their revenue expectation by about 2 percent, and Citigroup C, which only met their EPS expectation. 

The financial sector has rallied appropriately. In the last two weeks, every one of those stocks is either trading up or rallying off the lows. Citi, Wells Fargo, and Goldman, which all traded down following the report, have nearly regained all of those losses. 

The Leveraged ETF Trade

This trade has also played out in leveraged exchange-traded funds. That includes the Direxion Daily Financial Bull 3X Shares FAS and the Direxion Daily Financial Bear 3X Shares FAZ. FAS attempts to deliver triple the daily returns of the Russell 1000 Financial Services Index while FAZ, the bearish fund, looks to deliver triple the daily inverse returns of that benchmark. JP Morgan, Citi, Bank of America and Wells Fargo combine for almost 21 percent of the index FAS and FAZ track. 

Since Oct. 12, the day when the first of the big banks reported, FAZ has seen inflows of 1.39 million shares. FAS meanwhile has seen outflows of nearly 70 million shares. This suggests that traders have used the rally as a selling opportunity. FAS is up about 2.5 percent during this time, while FAZ is down about 5 percent. 

Due to the volatile nature of leveraged ETFs, such as FAS and FAZ, these products are best used as short-term trades, not long-term investments. While those are words of caution, the good news is that earnings seasons are often ideal times for active, risk-tolerant traders to consider leveraged ETFs.

Plenty Of Debate

“Financials have had a decent year with the S&P 500 Financials Index up 6 percent year-to-date or YTD. But recently, they’ve been struggling,” said Direxion. “At this point, there seems to be no Dodd-Frank repeal legislation in the works, and the ten-year yield has dropped from 2.5 percent+ to the low 2 percent range. So, while there seems to be plenty that could go right for these stocks—rates could go up, regulations could ease, or the economy could reaccelerate—right now nothing seems to be going very well. Historically, these stocks are a bit of a mixed bag from a return perspective from September to December in the last ten years.”

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Returning to a Bank ETF. 

Lots Of Love For This ETF.