With No Fed Help, This Leveraged Bank ETF Is Soaring

By now, many investors know the tale of woe scripted by the financial services sector and its corresponding exchange traded funds this year. Much of the burden being faced by the S&P 500's second-largest sector weight comes courtesy of the Federal Reserve, which has yet to raise interest rates this year and it appears increasingly unlikely multiple rate hikes will be seen before year-end.

Rate-sensitive regional bank stocks and ETFs have endured plenty of punishment due to the Fed's reluctance to raise rates because this group is more correlated to rates than are larger money center and investment banks.

Unbeknownst to many investors there are leveraged regional bank ETFs, including the Direxion Daily Regional Banks Bull 3X Shares DPST and the Direxion Daily Regional Banks Bear 3X Shares WDRW. Based on tickers alone, these ETFs should be easy to remember.

A Closer Look

In the case of DPST, the lone bullish, triple-leveraged regional bank ETF on the market today, has been quietly soaring and doing so without the assistance of the Fed. After finding support around $20 early this month, DPST managed to close over $29 yesterday.

DPST attempts to deliver triple the daily returns of the Solactive Regional Bank Index, while WDRW seeks to deliver three times the daily inverse returns of that benchmark, so these are not leveraged cousins to KRE. Currently, there is no plain vanilla regional bank ETF listed in New York that tracks the Solactive Regional Bank Index.

Obviously, what is good for DPST is bad for WDRW. After notching a close above $40 earlier this month, the only bearish triple-leveraged regional bank ETF available to investors slipped below $27 yesterday.

The index DPST and WDRD attempt to reflect the performance of “utilizes each security’s free-float market capitalization to determine the largest regional banks. Once the 50 largest regional bank securities are determined, the holdings are then equal weighted. As of June 30, 2016 the Index had a median market capitalization of $3.14 billion and an average market capitalization of $4.70 billion,” according to Direxion. 

None of the stocks in that index account for more than 2.3 percent of its weight and the benchmark's top 10 holdings combine for less than 21 percent of its weight, indicating that single-stock issues, good or bad, are unlikely to move DPST and WDRW. Rather, these ETFs can be viewed as sector bets on Fed policy and other broad themes within the regional banking industry.