Latest Rate Hike Benefits Bears in Leveraged Regional Bank ETF
This article was originally published on ETFTrends.com.
Yesterday, the Federal Reserve confirmed the general consensus by the capital markets that interest rates were likely to rise as Fed Chairman Jerome Powell capped off a two-day monetary policy meeting with the announcement that the federal funds rate would increase by 25 basis points to 2.25. This didn't sit well for banks worried that the increased rates would pare down their lending businesses as the Direxion Daily Regional Bnks Bull 3X ETF (DPST) lost 5.76% to end yesterday's market session.
However, for the bears situated in positions like the Direxion Daily Regional Bnks Bear 3X ETF (WDRW) , they benefitted with a 7% jump and an additional 1.56% increase today as of 3:30 p.m. ET following yesterday's interest rate announcement.
"Banking stocks closed lower on Wednesday after the Federal Reserve raised interest rates a quarter of a point, or 25 basis points, to 2%–2.25%," noted Market Realist's Andrew Brunton in an article. "That led to concerns of a further slowdown in lending."
WDRW seeks daily investment results that equate to 300% of the inverse of the daily performance of the S&P Regional Banks Select Industry Index. The fund invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse or short leveraged exposure to the index, which 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 GICS regional banks sub-industry.
On the other side, DPST seeks daily investment results equal to 300% of the daily performance of the S&P Regional Banks Select Industry Index. DPST invests in securities comprising the index, ETFs that track the index and other financial instruments that provide daily leveraged exposure to the index or ETFs that track the index. The index is a modified equal-weighted index designed to measure performance of the stocks comprising the S&P Total Market Index that are classified in the GICS regional banks sub-industry.
"It’s a general trend that higher interest rates boost bank’s profitability by expanding net interest margins," Brunton wrote. "However, in a rising interest rate scenario, a customer’s ability to afford a loan decreases, negatively impacting the demand for mortgage loans."
From a year-to-date perspective, DPST has been outlasting WDRW despite the two previous rate hikes the Fed incorporated to start the first half of 2018. Through the end of 2018, both ETFs may reach a convergence depending on how much these rate hikes actually do negatively impact the overall businesses of regional banks.
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