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Breaking the Banks: Finding Leverage In The Financial Sectors Schism

March 04, 2020

The financial sector almost always provides a unique and often fascinating snapshot of the domestic economic picture. That’s certainly the case in banks in 2020, which sees an odd schism emerging between the multinational financial giants and their regional bank and credit union counterparts.

The disparity is clear when comparing the one-year chart of the Direxion Daily Financial Bull 3X Shares (FAS) and Direxion Daily Regional Banks Bull 3X Shares (DPST) compared to the S&P 500 (purple).

Source: Yahoo Finance, Data as of February 25, 2020. Past performance is not indicative of future returns. One cannot invest directly in an index.  Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost.  Current performance may be lower or higher than the performance data quoted.

For standardized performance and the most recent month-end performance, click here.

Over the last two months, FAS is up 50%, while DPST has fallen 34% (the S&P 500 has split the difference, up 11%).

The divergence in the performance of the two funds paints a picture of the industry.

Regionals Bank On M&A Momentum

We’ll start small with the regional banks and credit unions, which for the most part entered 2020 battered but buoyant. Battered as a result of a spate of interest rate cuts that tightened the margins for the industry, but buoyant thanks to an 80% increase in mergers and acquisitions deal value through 2019, not the least of which was the massive $28B merger at the start of the year between BB&T and Suntrust merger that resulted in the formation of Truist Financial.

Disappointing fourth-quarter earnings took their toll on many of the major components of the industry like Zions, Huntington and the aforementioned Truist Financial. However, even those that posted results above expectations like Citizen’s Financial Group and PNC have traded lower thanks to diminished outlook and contracting net interest income from lending.

The domestic economic picture of low growth and stable interest rates suggests that this is unlikely to change dramatically over the next 10 months.

Nevertheless, this stability could end up working in the regional banks’ favor if lending and/or business activity bolsters bank portfolios. Contrarians might also look to the Direxion Daily Regional Banks Bull 3X Shares (DPST) ETF for income generation, since most in the industry offer some kind of dividend program and many of them, like Comerica, PNC and Bank OZK, have recently raised theirs.

Additionally, traders could look for cues for a potential continuation of 2019’s M&A activity, although the American Bankers Association’s annual M&A outlook sees fewer deals on the horizon despite a conducive merger environment.

Nationals Tick Higher On Tech

Given that the regional banks are experiencing secular economic headwinds, you would think national banks would be faced with similar problems, and you would be right. Most of the major banks are flat on the year or trading in the red.

Keep in mind that 2019 was a strong year for financial stocks overall. JP Morgan, Bank of America and Citigroup each ended the year up between 40% and 50% at new all-time highs. This was in spite of three interest rate cuts narrowing their margins, the effects of which become very clear when looking at the year-over-year revenue for these companies. Though not awful, each of JPMorgan, Bank of America and Citigroup posted lower year-over-year revenue growth from 2018-2019 than in 2017-2018 when interest rates were 75 basis points* higher.

So, why then is FAS among Direxion’s top bullish funds? The same reason the rest of the market is: technology. Namely, payment technology, which has helped drive up prices in the likes of Visa, Mastercard and Paypal by as much as 10% on the year.

And much like their regional counterparts, a lot of the investment energy surrounding the national banks is about who is buying what. Visa’s massive $5.3B acquisition of fintech platform Plaid was a potentially huge boost for the stock, and Charles Schwab’s purchase of TD Ameritrade may have helped Chuck’s stock remain in the black in 2020. Then there is Morgan Stanley’s recently announced acquisition of E-Trade, which has depressed the stock somewhat, but shows that the financial industry has M&A on the brain.

These acquisitions could prove to have a long tail in the market. However, the spending spree could also have consequences on the sector if their revenue-generation continues to slow, which is not impossible given the modest growth expectations for both the U.S. and global economies. All of which might signal a resurrection for the Direxion Daily Financial Bear 3X Shares (FAZ).

Looking at why the regional and national financial entities are trading so differently does reveal the distinct, yet inter-connected, market conditions that are playing on each. Investors with a particular conviction on the sector would do well to pay close attention to both sides of the financial landscape.

Related Leveraged ETFs:

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. 

For the funds’ standardized and most recent month end performance click here.

Short-term performance, in particular, is not a good indication of the fund’s future performance, and an investment should not be made based solely on returns. Because of ongoing market volatility, fund performance may be subject to substantial short-term changes.

FAS Index Top 10 Holdings (as of 03/31/2020)

Berkshire Hathway 8.22
JPMorgan Chase 6.45
Visa 6.34
Mastercard 4.92
Bank Of America 3.90
Paypal 2.58
Wells Fargo 2.46
American Tower 2.20
Citigroup 2.05
Fidelity 1.70

DPST Index Top 10 Holdings (as of 03/31/2020)

First Republic Bank 3.65
M&T BANK 3.10
SVB Financial 3.09
PNC Finl 3.08
Peoples United Financial 3.07
Truist Financial 2.81
Huntington Bancshares 2.73
Zions 2.67
Regions Financial 2.66
KeyCorp 2.64

* Basis point: Basis points (BPS) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%, or 0.0001, and is used to denote the percentage change in a financial instrument

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Shares of the Direxion Shares are bought and sold at market price (not NAV) and are not individually redeemed from a Fund. Market Price returns are based upon the midpoint of the bid/ask spread at 4:00 pm EST (when NAV is normally calculated) and do not represent the returns you would receive if you traded shares at other times. Brokerage commissions will reduce returns. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV. Some performance results reflect expense reimbursements or recoupments and fee waivers in effect during certain periods shown. Absent these reimbursements or recoupments and fee waivers, results would have been less favorable.

CUSIP Identifiers have been provided by CUSIP Global Services, managed on behalf of the American Bankers Association by Standard and Poor’s Financial Services, LLC, and are not for use or dissemination in any manner that would serve as a substitute for a CUSIP service. The CUSIP Database, ©2011 American Bankers Association. “CUSIP” is a registered trademark of the American Bankers Association.

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The “S&P Regional Banks Select Industry Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty Asset Management, LLC (“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, 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 S&P Regional Banks Select Industry Index.

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