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The Right ETF For Flailing Financial Stocks

This article was originally published on ETFTrends.com.

It is official. After stumbling nearly 1% last Friday, the Financial Select Sector SPDR (NYSEArca: XLF) , the largest exchange traded fund dedicated to the financial services sector, is just over 20% below its 52-week high, many think the fund is in a bear market.

The same is true for an array of financial services stocks and ETFs, which is good news for the Direxion Daily Financial Bear 3X Shares (FAZ) . FAZ attempts to deliver three times the daily inverse performance of the Russell 1000 Financial Services Index.

“With Friday's decline, financials joined the energy and materials sectors in bear-market territory. Energy is down 21.3 percent from its 52-week high reached in May, while material stocks are down 20.35 percent from a record set in January,” according to CNBC.

The 2018 performances of XLF and rival financial services ETFs are undoubtedly disappointing for investors that bet the sector would rally against the backdrop of rising interest rates. The Federal Reserve has boosted borrowing costs three times, moves many market observers believed would lift the fortunes of the rate-sensitive financial sector.

Big Returns

As a leveraged ETF, FAZ is not intended to be a long-term investment and should not be held for more than a few days, but its recent performance is undoubtedly compelling. The bearish financial services ETF jumped nearly 9% last week.

“Financials fell 1 percent on Friday, closing down 20.06 percent from a 52-week high reached in January. The decline was driven by a fall in bank shares amid worries about slowing global economic growth,” reports CNBC.

Traders have pulled just over $31 million from FAZ in the fourth quarter, indicating that they could be taking profits in the leveraged inverse product as FAZ is sporting a fourth-quarter gain of over 38%.

Other factors may be hampering the sector. Some market observers warned that banks may even be cutting back on lending as bankers are becoming more concerned over the late-cycle U.S. economy. Indicators such as credit-card charge-off rates have increased, though the rate leveled off over the summer.

FAZ's bullish counterpart is the Direxion Daily Financial Bull 3X Shares (FAS) . FAS seeks to deliver three time the daily performance of the Russell 1000 Financial Services Index.

For more information on the banking sector, visit our financial category.