Leveraging The Regional Bank ETF Trade

Avid followers and traders of financial services stocks know the story all too well at this point. The Federal Reserve declined to raise interest rates following its September meeting. Financial services stocks and exchange traded funds languished in the wake of that decision.

The SPDR S&P Regional Banking ETF KRE is a prime example of that phenomenon. As seasoned financial services investors and traders well know, regional bank stocks and ETFs, such as KRE, have eagerly anticipating higher interest rates. Obviously, the Fed did not deliver last month and over the past month, KRE, the largest regional bank ETF, has shed more than two percent. 

Simply put, net interest margins at regional banks have been suppressed by the Fed's zero interest rate policy and reversing that policy is seen as an important catalyst in boosting profits for the banks in ETFs such as KRE. Active traders willing to ratchet up their risk profiles now have leveraged ideas with which to play the regional bank trade.

In August, Direxion, the second-largest issuer of inverse and leveraged ETFs, rolled out the Direxion Daily Regional Banks Bull 3X Shares DPST and the Direxion Daily Regional Banks Bear 3X Shares WDRW. DPST, the bullish member of that pair, will look to deliver triple the daily returns of the Solactive U.S. Regional Banks Total Return Index while WDRW will attempt to produce three times the daily inverse performance of that index. 

“Regional banks are positioned well within the banking sector. Legislative and regulatory recoil from the role played by investment banks in the financial crisis has limited their profit potential. New laws and regulations now require the largest lenders to hold much more capital on a relative basis than regional banks. In contrast to the too-big-to-fail banks, the prospect of interest rates rising is a big positive for regionals.  Investors in regional stocks are betting that rising interest rates will improve the banks’ profitability, since consumer/business loans are their core businesses,” said Direxion in a recent research note.

An important element regarding DPST and WDRW is that they are not the leveraged equivalents of KRE. As was noted earlier, KRE has traded lower over the past month. However, by virtue of tracking a different index than the giant regional bank ETF, DPST has climbed nearly eight percent over the past 30 days.

Of course, the bull thesis for DPST increases as traders begin pricing in a Fed rate hike, but there are no guarantees on that front. That means WDRW could be a nifty idea if the Fed continues standing pat. 

“The financial world has been anticipating an interest rate launch for five years. And it’s anyone’s guess when liftoff takes place. Either way, traders need to be nimble and ready for anything. And if you’re trading with leverage, you should always be sure to monitor your positions often,” adds Direxion.