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Investors Bulk up on Bank ETFs, Options


Concerns that the Federal Reserve is close to raising interest rates are no concern at all for investors in financial services exchange traded funds, one of the most prolific asset-gathering corners of the ETF space in recent months.

Rising Treasury yields have been a driving force behind financial services sector ebullience. Put simply, interest rates play a significant role in investors’ attitude toward bank stocks and ETFs. Investors are responding by pouring into ETFs such as the Financial Select Sector SPDR (XLF) and the corresponding bullish options.

“For every 100 bullish contracts on the Financial Select Sector SPDR Fund, 112 puts were outstanding. That’s near the highest ratio since 2012, data compiled by Bloomberg show. Options protecting against a 10 percent drop in the ETF cost 6.16 points more than calls betting on a 10 percent rise, three-month data show. The spread, known as skew, reached 5.07 on June 16, the lowest since July,” reports Lu Wang for Bloomberg.

XLF, the largest financial services ETF, has hauled in $811.5 million in new assets this month after adding nearly $545 million in new assets last month. Inflows to financial services ETFs, including XLF, arrived after professional investors shunned the sector in the first quarter. [Pros Ditched Bank ETFs too Soon]

The May flows to bank ETFs are interesting when accounting for seasonal trends, which highlight June weakness for the financial services sector. On a historical basis, XLF is the worst of the nine SPDRs in the sixth month of the year. Wells Fargo (WFC), Warren Buffett’s Berkshire Hathaway (BRK-B) and Dow component J.P. Morgan Chase (JPM) combine for over a quarter of XLF’s weight. [Good News for Financial Services ETFs]

“The Fed will raise rates for the first time since 2006 in September and lift them to at least 1.5 percent next year, according to the median forecast of more than 50 economists in a Bloomberg survey,” according to the news agency.

Although money has been piling into into ETFs like XLF in recent months, investors have taken a more muted approach to leveraged equivalents. For example, the ProShares Ultra Financials (UYG) , the double-leveraged answer to the iShares U.S. Financial Services ETF (IYG) , has not added any new money this month.

The Direxion Daily Financial Bull 3X Shares (NYSEArca: FAS ) , which attempts to deliver triple the daily returns of the Russell 1000 Financial Services Index, has added over $8 million this month. FAS and UYG are up 4.5% an 3.3%, respectively, over the past month.

Direxion Daily Financial Bull 3X Shares