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Finessing the Financial Sector Trade

June 27, 2022

Editor’s note: Any and all references to timeframes longer than one trading day are for purposes of market context only, and not recommendations of any holding timeframe. 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 ETFs are not for you.

In many ways the financial sector is the foundation of the economy.  Under the current fiat-based monetary system, money is literally debt, of which banks are the primary dealers.  The financial sector hasn’t offered very appetizing returns recently, but shorter-term there are some interesting opportunities, especially as we move towards a new macroeconomic regime. 

Will Banks Boom or Bust?

The financial sector has historically outperformed in rising rate environments.  However, this hasn’t unfolded accordingly in the past year, as both inflation and interest rates soar to multi-year highs.  This could just be a temporary anomaly in the correlation, or it could mark the end of this traditional relationship.  The story behind this connection centered around interest rate spreads.  As the Fed raised rates, banks would pass off higher interest costs to borrowers, and the increase in percentage-terms would increase profits.  With new Consumer Price Index (CPI)* numbers set to be released on June 30, any upside surprises could prove to be a catalyst for the Fed to be more aggressive in their hiking program.  This could ultimately redirect capital flows towards financials.  For traders looking to bet on a comeback in this correlation, Direxion offers the Daily Financial Bull 3x Shares (Ticker: FAS) fund, which tracks 300% of the daily upside in the Russel 1000 Financials 40 Act 15/22.5 Daily Capped Index.*

Below is a daily chart of FAS as of June 23, 2022:

Source: TradingView.com as of June 23, 2022.

Candlestick charts display the high, low (stick), open, and closing prices (body) of a security for a specific period.

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 most recent month-end performance go to Direxion.com/etfs. For standardized performance click here.

Has Technology Permanently Disrupted Banking?

Many innovations came out of the global financial crisis of 2009.  The most notable of all is blockchain technology, but the fintech space is a leading area of growth within finances.  It appears as though much of this new capital investment has come at the behest of traditional finance, otherwise known as “TradFi” in these innovative circles.  With respect to interest rates, there is also the possibility of higher rates deterring people from borrowing as much as they were during the years of low rates.  This could actually undermine profits for banks, especially if the economy goes into a recession.  Revised Q1 Gross Domestic Product (GDP)* numbers are set to be released on June 29th, which will confirm how much the economy slowed in the first quarter.  Keep in mind that we’re only one negative quarterly GDP print from technically entering a recession.  For traders looking to bet on sustained weakness in the financial sector, perhaps due to a broader economic downturn, Direxion offers the Daily Financial Bear 3x Shares (Ticker: FAZ) fund, which tracks 300% of the daily downside in the Russel 1000 Financials 40 Act 15/22.5 Daily Capped Index.*

Below is a daily chart of FAZ as of June 23, 2022:

Source: TradingView.com as of June 23, 2022.

Candlestick charts display the high, low (stick), open, and closing prices (body) of a security for a specific period.

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 most recent month-end performance go to Direxion.com/etfs. For standardized performance click here.

Niche Opportunities within Financials

It’s too early to tell how the blockchain revolution will impact TradFi in the long-run.  Many of these legacy institutions are adapting blockchain technology, especially as regulation comes into the sector.  This is something that can’t be neglected – in order for widespread adoption to occur, some element of regulation will need to unfold.  For those looking to bet specifically on the bullish side of financial innovation, Direxion offers a Daily FinTech Bull 2x Shares (Ticker: FNTC) fund, which seeks daily investment results, before fees and expenses, of 200% of the performance of the Indxx US FinTech and Decentralized Finance Index.* If traditional banking manages a comeback, bullish opportunities could also exist in the Daily Regional Banks Bull 3x Shares (Ticker: DPST) fund, which seeks daily investment results, before fees and expenses, of 300% of the performance of the S&P Regional Banks Select Industry Index.*

*Definitions:

The Consumer Price Index (CPI) measures the average change in prices over time that consumers pay for a basket of goods and services.

The Gross Domestic Product (GDP) is the total value of goods produced and services provided in a country during one year.

The Russell 1000 Financials 40 Act 15/22.5 Daily Capped Index (RIYFCTR) is a subset of the Russell 1000® Index and measures the performance of US large capitalization companies that are assigned to the Financials Industry by the ICB sector classification framework.

The Indxx US FinTech and Decentralized Finance Index (IUFDFI) includes U.S.-listed securities, including ADRs, of companies that derive a minimum of 50% of their total revenue from offering technology-driven financial services (“FinTech”), including companies that facilitate decentralized finance systems.

The S&P Regional Banks Select Industry Index (SPSIRBKT) is a modified equal-weighted index that is designed to measure performance of the stocks comprising the S&P Total Market Index that are classified in the Global Industry Classification Standard (GICS) regional banks sub-industry.

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.

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 www.direxion.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.

Investing in a Direxion Shares ETF may be more volatile than investing in broadly diversified funds. The use of leverage by a Fund increases the risk to the Fund. The Direxion Shares ETFs are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk, consequences of seeking daily leveraged, or daily inverse leveraged, investment results and intend to actively monitor and manage their investment.

The Russell 1000® Index is a trademark of Frank Russell Company (“Russell”) and has been licensed for use by the Trust. The Direxion Daily Financial Bull and Bear 3X Shares are not sponsored, endorsed, sold or promoted by Russell. Russell makes no representation regarding the advisability of investing in the Direxion Daily Financial Bull and Bear 3X Shares.

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, 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, Daily Inverse Index Correlation Risk, and risks related to Shorting and Cash Transactions. 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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