What Leveraged Financial Services ETFs Are Saying About The Fed

There were times during the global financial crisis when the Direxion Daily Financial Bull 3X Shares FAS and the Direxion Daily Financial Bear 3X Shares FAZ were two of the most well known exchange-traded funds around.

Obviously, FAS rose to infamy because it is a triple-leveraged play on the very sector that caused the crisis. Conversely, FAZ gained acclaimed (and later its own infamy) because there was a time when the triple-leveraged bearish ETF sported a Priceline-esque quadruple-digit price tag.

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FAS And FAZ A Bit Fuzzy

These days, things are far from sanguine for FAS and FAZ, which attempt to deliver triple the daily returns of the Russell 1000 Financial Services Index; or in the case of FAZ, three times the daily inverse returns of the Russell 1000 Financial Services Index. Year-to-date, FAS and FAZ are down 5.8 percent and 20.7, respectively.

Stocks in the index FAS and FAZ track include the usual suspects, such as JPMorgan Chase & Co. JPM, Wells Fargo & Co WFC, Citigroup Inc C and Bank of America Corp BAC.

Fortunately, the global financial crisis is in the past, but FAS and FAZ could spend some days in the sun as the Federal Reserve approaches its first interest rate hike in nearly decade. The move, which could happen this week, is widely expected to be a boon for financial services stocks and ETFs.

Trader Sentiment

Data suggest traders are warming up to these ETFs in advance of the Fed meeting. For example, FAS saw inflows of $49.5 million last Friday, a total exceeded by just one other leveraged Direxion ETF. Interestingly, that $49.5 million went a long way. A long way toward denting the fourth-quarter outflows from FAS, which now stand at $96.1 million.

In a sign that some traders are betting the Fed will not raise rates this week, which would likely prompt a short-term drubbing for bank stocks and ETFs as was seen in September, FAZ has added nearly $370 million in new assets this quarter.

Volume And Turnover

While volume in FAS and FAZ has not been jaw-dropping, turnover in the two ETFs has recently been increasing. For the five-day period ended December 14, volume in FAS was about 26 percent above the trailing 20-day average according to Direxion data. Over the same period, turnover in FAZ was almost 17 percent higher than the trailing 20-day average, according to Direxion data.

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