Leveraged Bank ETFs Step Into Earnings Spotlight

The first-quarter earnings season starts in earnest this week with the quarterly deluge of profit reports from big banks headlining the Easter holiday week's earnings slate.

Short-term events such as earnings reports make ideal opportunities to use leveraged exchange-traded funds. Using leveraged ETFs necessitates knowing the risks associated with them. Leveraged ETFs are designed to amplify returns on a daily basis, but these products can deviate in a big way from their stated objectives over longer holding periods.

Leveraged ETFs FAZ And FAS

Traders looking to profit from moves in bank stocks this week and this earnings season have some familiar names to turn to, namely the Direxion Daily Financial Bull 3X Shares FAS and the Direxion Daily Financial Bear 3X Shares FAZ ETFs.

FAS, the bullish member of that duo, is designed to deliver triple the daily returns of the Russell 1000 Financial Services Index (RGUSFLA). FAZ attempts to deliver triple the daily inverse returns of that benchmark.

With U.S. markets being closed Friday in observance of the Good Friday holiday, Thursday will be the day to deploy FAS or FAZ. On Thursday, Dow component JPMorgan Chase & Co. JPM, Citigroup Inc C, PNC Financial Services Group Inc PNC and Wells Fargo & Co WFC will report earnings for the first quarter of 2017.

Part of what makes Thursday so significant is that three of those banks, JPMorgan, Wells Fargo and Citigroup, represent the first-, third- and fifth-largest holdings respectively in the Russell 1000 Financial Services Index. Those stocks combine for over 16 percent of the index's weight, underscoring the point that Thursday could be an active day for FAS and FAZ.

The financials' laggard status — the sector has underperformed the overall market by about 3 percent in 2017 — is encouraging some traders to make bearish bets against the S&P 500's second-largest sector weight, which you can also do via the Direxion Daily Financial Bear 1X Shares FAZZ.

All of these conditions are coming off a month that saw the Federal Reserve raise the target federal funds rate for the third time since the end of 2015, making the sector one of the more compelling stories of the year.

Hawkish Fed Signifies Different Stories For FAZ, FAS

That hawkish tone has, predictably, led to vastly different stories for FAZ and FAS. FAZ, the bearish Direxion financial services ETF, has averaged daily outflows of $624,000, according to Direxion data.

Conversely, traders have been much more enthusiastic about FAS. The triple-leveraged bullish financials ETF averaged daily inflows of $3.26 million over that period.

However an individual feels about the future of the sector, Thursday's earnings and the reports from the rest of the banks in the index over the coming weeks are sure to cause volatility. If that's something valued, these funds represent a significant trading opportunity.

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