Financials' Losing Streak Lifts A Leveraged ETF

The financial sector has rebounded slightly after a 13-day losing streak—its longest ever—at the end of June, but the recent uptick hasn't stopped the bear trade in related ETFs. 

Short-term traders willing to bet on more declines for the financial services sector, the second-largest sector weight in the S&P 500, have been active in the Direxion Daily Financial Bear 3X Shares FAZ.

FAZ does not track the S&P 500 Financials Index. This Direxion ETF attempts to deliver triple the daily inverse returns of the Russell 1000 Financial Services Index. FAZ is up nearly 10 percent over the past two weeks.

That index devotes over 30 percent of its weight to bank stocks, a group that has been disappointing in the face of higher interest rates. Compounding the benchmark's rate woes is its 15.68 percent weight to real estate investment trusts (REITs), an asset inversely correlated to rising Treasury yields.

Why It's Important

“Coming into the year, many cited the tax overhaul and a rising rate environment as reasons for banks to rally. Instead, they’ve endured pressure from a flattening yield curve,” reports American Banker. “The losses also come ahead of the final phase of the Federal Reserve’s annual stress tests and waning consumer confidence.”

All of this is good news for FAZ, which is trading at it highest levels since the middle of the first quarter. Although interest rates are rising, regional banks are floundering as well. The S&P Regional Banks Select Industry Index is lower by more than 6 percent over the past week.

That is providing a lift to the Direxion Daily Regional Banks Bear 3X Shares WDRW. WDRW, which tries to deliver triple the daily inverse returns of the S&P Regional Banks Select Industry Index, jumped 13 percent since June 22 on above-average volume and is up more than 15 percent over the past month.

What's Next

Ongoing struggles for the financial services could compel short-term traders to revisit FAZ and WDRW. Perhaps surprisingly, FAZ is averaging daily outflows over the past month while WDRW has seen no inflows or outflows over that period, according to Direxion data.

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