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Profit from Rising Financial Stocks with Leveraged ETFs

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The financial sector seems a clear winner of Trump presidency and Fed policy. The stocks in the sector are enjoying a surge since the election, pushing the ultra-popular Financial Select Sector SPDR Fund (XLF - Free Report) up by 17%. This is more than double the gains of 7.1% for the broad market fund (SPY - Free Report) .

The initial gains came on the heels of Trump’s promise to deregulate the industry and lower corporate taxes. In addition, rising interest rates and stabilizing oil prices are backing the rally (read: Will Trump & Fed Make 2017 a Year of Financials ETFs?).

Trump Action

Late last week, the President took actions to roll back regulations in the banking and asset management sectors. He signed an executive order to dismantle the Dodd-Frank Act, which was enacted in the aftermath of the financial crisis and has crimped some of the business lines of the banks. The other order is to repeal the fiduciary rule slated for April, aimed at financial advisors to act in the best interest of their clients when providing retirement advice rather than seeking higher commissions for themselves.

Relaxing of regulations will undoubtedly increase profitability of the companies, particularly banks, and boost dividends and buybacks.

Fed Policy

At its December FOMC meeting, the Fed raised interest rates for the second time in a decade by a quarter percentage point to 0.50–0.75% from 0.25%–0.50%. The central bank further signaled a faster pace of rate increase with three lift-offs in 2017, two or more in 2018 and three in 2019. A rising interest rate scenario is highly favorable for the financial sector as the steepening yield curve would bolster profits for banks, insurance companies and discount brokerage firms.

Other Factors

The combination of other factors is also leading to higher prices for financial stocks. Accelerating economic growth, strengthening job market, growing consumer confidence, solid housing market may lead to higher demand for loans and all types of financial services. Further, stabilizing oil prices are acting as catalysts given that most banks are highly exposed to the energy sector.

Moreover, the upside to the finance sector is confirmed by the Zacks Sector Rank in the top 6% with about 60% of the industries having ranking in the top 36%. This suggests continued outperformance in the sector for the coming months.
If this wasn’t enough, XLF, with an asset base of around $22.5 billion and average daily volume of around 63.8 million shares, has gathered over $7 billion from its asset base since election, according to data compiled by (read: Trump & Earnings Effect: Hit and Flop ETFs of Last Week).

Given the massive inflow and the bullish outlook, the appeal for financial ETFs, especially the banks, have raised. As a result, investors who are bullish on the sector right now may want to consider a near-term long. Fortunately, with the advent of ETFs, this is quite easy as there are many options to accomplish this task. Below we highlight them and state how each stands out among the rest.

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 $791 million in its asset base and trades in a moderate volume of around 57,000 shares per day on average. UYG has returned about 27.8% since election.

ProShares UltraPro Financial Select Sector

Investors having a more bullish view and a higher risk appetite may find FINU interesting as the product provides three times (3x) exposure to the daily performance of the S&P Financial Select Sector Index. It has been able to manage $19 million in its asset base and trades in a paltry volume of about 9,000 shares per day on average. Expense ratio is 0.95%. FINU was up 58.3% in the same timeframe (read: 10 Leveraged/Inverse ETFs with Over 30% Surge in November).

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 annual fee of 97 bps, it is extremely popular with AUM of $1.3 billion and trades in heavy volume of around 3.4 million shares. The fund has gained 41.9% in the same timeframe.

ProShares Ultra S&P Regional Banking ETF

This fund provides two times leveraged exposure to the daily performance of the S&P Regional Banks Select Industry Index. It is an unpopular and illiquid choice in the space with AUM of $12.1 million and average daily volume of 5,000 shares. Expense ratio comes in at 0.95%. The fund has added 52.2% since election.

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

This fund seeks to deliver thrice the return of the S&P Regional Banks Select Industry Index, charging 96 bps in fees per year. DPST has accumulated $20.4 million in its asset base and trades in paltry volume of around 13,000 shares a day on average. The fund is up 84.7% in the same timeframe (read: 6 Best Performing Leveraged ETFs of 2016).

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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