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Play Soaring Financial Sector With These Leveraged ETFs

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The financial sector has been soaring lately on rising yields with many stocks hitting new highs. This is especially true as the 10-year yields topped the 1.6% level last week — its highest since Jun 4 amid the prospect of the Fed’s policy tightening and persistent high inflation.
In the last Fed meeting, chairman Jerome Powell signaled the tapering of bond buying followed by interest rate hikes as early as next year. The central bank is expected to begin scaling back the monthly bond purchases as soon as next month and complete the process by mid-2022. The policy statement also revealed that nine of 18 Fed policymakers foresee a liftoff in interest rates next year compared to seven policymakers in June. The median dot also projects three to four total rate hikes by the end of 2023. Through the end of 2024, the median FOMC member sees six to seven total rate hikes (read: ETFs to Bet On as Fed Turns Hawkish, Signals Tapering).

Meanwhile, inflation, which measures the increase in the cost of living over time, is running at 5.3% — the highest in nearly 13 years — driven by surging consumer demand, rising energy prices, and supply chain-related shortages. Additionally, the Fed’s latest preferred inflation gauge rose 3.6% in August from the year-ago month, representing the biggest jump since 1991.

The shift toward a tighter monetary policy will push the yields higher, thereby benefiting the financial sector. This is because rising rates will expand profits for banks, insurance companies, discount brokerage firms and asset managers. As the financial institutions seek to borrow money at short-term rates and lend at long-term rates, a steepening yield curve will lead to earning more on lending and paying less on deposits, thereby creating a wider spread.

Additionally, the combination of some other factors bodes well for the financial sector. Rapid vaccination, and economic and business reopening are powering consumer spending and resulting in robust growth. These will lead to higher demand for loans and all types of financial services. Better-than-expected manufacturing activity in September aided optimism about the economic recovery. If the economy continues to recover, loan growth is expected to bounce back strongly in the coming quarters. Further, higher oil prices are acting as catalysts given that most banks are highly exposed to the energy sector (read: 5 Best ETFs & Stocks of the Top Performing Energy Sector).

How to Play?

Amid the soaring yields, the financial sector looks attractive. Many investors have turned bullish on the sector and are seeking to tap this opportunity. For them, a leveraged play on financials could be an excellent idea as these could see huge gains in a very short time frame when compared to the simple products.

Below we have highlighted the leveraged ETFs that could be excellent picks:

ProShares Ultra Financials (UYG - Free Report)

This fund seeks two times (2X) leveraged exposure to the Dow Jones U.S. Financials Index, charging 95 bps in fees. It has amassed $875 million in its asset base and trades in a moderate volume of around 64,000 shares per day on average.

Direxion Daily Financial Bull 3x Shares ETF (FAS - Free Report)

This product also provides three times exposure to the Russell 1000 Financial Services Index. Though it charges an annual fee of 94 bps, it is extremely popular with AUM of $3.3 billion and trades in heavy volume of around 1.7 million shares.

Direxion Daily Regional Banks Bull 3x Shares (DPST - Free Report)

This fund seeks to deliver thrice the returns of the S&P Regional Banks Select Industry Index, charging 95 bps in fees per year. DPST has accumulated $487.3 million in its asset base and trades in moderate volume of around 310,000 shares a day on average.

MicroSectors U.S. Big Banks Index 3X Leveraged ETN (BNKU - Free Report)

BNKU seeks to offer three times exposure to the Solactive MicroSectors U.S. Big Banks Index. The ETN has accumulated $136.3 million in its asset base. It charges 95 bps in annual fees and trades in an average daily volume of about 180,000 shares (read: 4 Leveraged ETF Areas That Are Up 100% This Year).

Bottom Line

As a caveat, investors should note that such products are suitable only for short-term traders as these are rebalanced on a daily basis (see: all Leveraged Equity ETFs here).

However, for ETF investors, who are bullish on the financial sector for the near term, either of the above products could make an interesting choice. Clearly, a near-term long could be intriguing for those with high-risk tolerance, and a belief that “trend is the friend” in this corner of the investing world.

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