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Betting On — or Against — Financial Stocks

XChange NewsletterMay 13, 2024 | 2 min read
Facade of a bank sitting atop a cloud, on a blueish green background

Editor's note: Any and all references to time frames longer than one trading day are for purposes of market context only, and not recommendations of any holding time frame. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don't have the resources, time or inclination to constantly monitor and manage your positions, leveraged and inverse ETFs are not for you.

The financial sector in 2023 was marked by unpredictable events reshaping the banking and investment landscape. From Silicon Valley Bank's collapse to the surge in interest income for giants like JPMorgan Chase & Co. (NYSE: JPM) and Bank of America Corporation (NYSE: BAC), it was a year of notable developments. While many regional banks struggled, major financial institutions thrived, benefiting from higher interest rates. However, impending market events could alter this landscape.

Higher Rates, Higher Rewards For Big Banks

Currently, interest rates are expected to remain elevated due to persistent inflation*. This environment favors large financial institutions, such as those in the Financial Select Sector Index*. While regional banks face pressure to raise savings rates, major banks maintain low rates, allowing them to profit from wider spreads. However, this situation may soon change.

Catalysts To Watch

During the Federal Reserve's meeting in early May, rates were held steady for the sixth time in a row, indicating that it may take longer than expected to return to the 2% inflation target. Additionally, big banks like Berkshire Hathaway, which reported a 39% increase in their operating profit year-over-year, continue to report earnings through Mid-May. These earnings could significantly impact the Financial Select Sector Index due to their significant weight. Market sentiment surrounding rates has influenced and will likely continue to influence the index’s movement in response to Berkshire’s and other’s earnings.

Direxion’s Daily Financial Bull and Bear 3X Trades

For investors seeking to capitalize on financial sector movements, Direxion’s Daily Financial Bull 3X Shares (Ticker: FAS) and Daily Financial Bear 3X Shares (Ticker: FAZ) offer strategic options. FAS and FAZ seek daily investment results, before fees and expenses, of 300%, or 300% of the inverse (or opposite), respectively, of the performance of the Financial Select Sector Index. However, investors must understand the risks associated with leverage. While these ETFs offer potential for significant gains, they also pose substantial losses, making them suitable for those capable of managing leverage risks and targeting short-term trends in the financial sector.

Navigating Higher For Longer Rates

In the coming weeks and months, the financial sector will continue to be influenced by Federal Reserve policies and potential market stress. The timing of rate changes and their impact on major financial institutions remains uncertain. However, upcoming events hold the power to sway the sector. Whether bullish or bearish, Direxion’s Daily Financial Bull and Bear 3X Shares ETFs may provide a potent tool for navigating potential sector volatility.

*Definitions and Index Descriptions

An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at A Fund’s prospectus and summary prospectus should be read carefully before investing.

Leveraged and Inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk and who actively manage their investments.

The “Financial Select Sector Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Financial Select Sector Index.

The Index is provided by S&P Dow Jones Indices (the “Index Provider”) and includes securities of companies from the following industries: Banks; Thrifts & Mortgage Finance; Diversified Financial Services; Consumer Finance; Capital Markets; Insurance; and Mortgage Real Estate Investment Trusts (REITs). One cannot directly invest in an index.

Direxion Shares Risks — An investment in each Fund involves risk, including the possible loss of principal. Each Fund is non-diversified and includes risks associated with the Funds’ concentrating their investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Other Investment Companies (including ETFs) Risk, Cash Transaction Risk, Passive Investment and Index Performance Risk, and risks specific to the securities of the financial sector. Performance of companies in the financials sector may be materially impacted by many factors, including but not limited to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Additional risks include, for the Direxion Daily Financial Bull 3X Shares, Daily Index Correlation Risk, and for the Direxion Daily Financial Bear 3X Shares, Shorting or Inverse Risk and Daily Inverse Index Correlation Risk. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.

Distributor: Foreside Fund Services, LLC.

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