The Financial Select Sector SPDR (NYSE: XLF), the largest exchange-traded fund dedicated to financial services stocks, rose 1.3 percent on Thursday, but the ETF is perilously close to turning negative on a year-to-date basis.
Only one other sector, energy, is in the red this year.
Two factors magnify the struggles of the financial services sector: the sector will, barring a quick rally, likely be relegated to third place in the S&P 500 after being surpassed by healthcare. Additionally, XLF is essentially flat on the year while the S&P 500 resides near all-time highs and is up more than 8 percent.
All that for a sector that was supposed to rally following the Federal Reserve's March interest rate hike. Potentially making matters worse for the already moribund financial services sector is seasonality—June is usually unkind to the sector and related ETFs such as XLF.
Feeling The Financials
The aforementioned factors could spell near-term opportunity with Direxion Daily Financial Bear 3X Shares (NYSE: FAZ). Reminding investors that leveraged ETFs, including FAZ, are not to be held for lengthy holding periods, FAZ is off more than 10 percent this year, even as the sector it tracks scuffles.
FAZ attempts to deliver triple the daily inverse returns of the Russell 1000 Financial Services Index. XLF does not track that index.
“Leveraged and inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage," according to Direxion, one of the largest issuers of inverse and leveraged ETFs. "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 investors who understand leverage risk and who actively manage their investments."
Interestingly, traders have recently been pulling money from the Direxion Daily Financial Bull 3X Shares (NYSE: FAS), the bullish counterpart to FAZ. In May, FAS averaged daily outflows of $2.66 million, according to Direxion data. That could be a sign some aggressive traders are tiring of waiting for financials to pop.
With seasonal lethargy about to set in and the likelihood of a June rate hike dwindling, opportunistic traders could take advantage of short-term plays with FAZ. On an intraday basis, of course.
Disclosure: Todd Shriber owns shares of XLF.
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