With just over a month before Election Day, many investors are by now well acquainted with which sectors Wall Street views as vulnerable under either a Hillary Clinton or Donald Trump presidency. When it comes Clinton, the healthcare sector, specifically biotechnology and pharmaceuticals stocks, have been highlighted as potentially vulnerable if Clinton wins.
Some market observers believe financial services stocks belong in that group as well. While the primary reason for the struggles of the S&P 500's second-largest sector weight this is laid at the doorstep of the Federal Reserve, which has not raised interest rates in 2016, a Clinton presidency is not seen as a boon to bank stocks.
For risk-tolerant traders, the next several weeks could bring opportunity with the Direxion Daily Financial Bull 3X Shares (NYSE: FAS) or the Direxion Daily Financial Bear 3X Shares (NYSE: FAZ). FAS, the bullish member of the duo, seeks to deliver triple the daily performance of the Russell 1000 Financial Services Index while FAZ attempts to deliver triple the daily inverse returns of that benchmark.
That index is a “subset of the Russell 1000 Index that measures the performance of the securities classified in the financial services sector of the large cap U.S. equity market. As of June 30, 2016, the Index had an average market capitalization of over $17.59 billion dollars and a median market capitalization of $7.20 billion,” according to Direxion.
The Fed is almost universally viewed as one of the strongest determinants of performance for financial services ETFs but the central bank does not appear likely to oblige as bonds markets are pricing in diminishing odds of even one rate hike before the end of this year. That deals a blow to a sector and its ETFs that came into 2016 with hopes of up to four rate hikes. The Fed's reluctance to raise rates also explains, at least in part, why FAZ was a solid performer last month while FAS stumbled.
As for the idea of a Clinton White House, that could put the spotlight on FAZ in the days immediately following the November election.
“If Hillary and the Democrats win, financial stocks may be affected. The Democrats’ platform endorses an 'updated and modernized version' of Glass-Steagall and breaking up too-big-to-fail banks that pose a risk to the American economy. Former Secretary Clinton has said she wouldn’t hesitate to use existing laws to force financial institutions to shrink—if regulators deemed that step necessary,” said Direxion in a recent note.
For his part, Republican challenger Donald Trump has vowed to repeal the Dodd-Frank Act, rhetoric that could prove beneficial to FAS should Trump upset Clinton.
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