Among sector exchange-traded funds, the Financial Select Sector SPDR Fund (NYSE: XLF) gets plenty of notoriety. Those are the breaks for the largest ETF tracking the financial services sector, which is now the third-largest sector weight in the S&P 500 following the separation of real estate into its own sector.
Historical Performance And Seasonality
Amid election year uncertainty and ongoing speculation about the timing of a rate hike from the Federal Reserve, investors should be cautious about betting on more of the same in the fourth quarter.
Those are external factors that history says XLF does not need to contend with in November, a month in which the largest financial services ETF historically lags the other sector SPDR funds.
Some options traders appear to be positioning for some downside in XLF or are tapping the ETF's options to hedge long positions in the fund. Street One Financial Vice President Paul Weisbruch recently highlighted increased activity in November and December XLF puts.
“XLF has not traded as low as $19 since late September, and that dip was a very brief stay, as the fund rallied right up until core earnings season for most of the group. Today XLF is hovering right in around its 50 day moving average, and apparently the December put buyers believe that a significant pullback from even these levels is possible,” said Weisbruch in a recent note.
Is It All For The Hedge?
While there is no shortage of macro issues that could weigh on XLF and rival ETFs, including Election Day, the Fed and weakness in European bank stocks, XLF flows suggest the recent uptick in bearish options activity could be for hedging purposes. Since the start of the current quarter, XLF has added nearly $615.3 million in new assets.
XLF “has had a hard time in 2016 in terms of fund flows, losing $3.8 billion to redemption flows thus far. We have spoken about this before because the most recent options flows in XLF consisting of put buyers is not a new theme,” added Weisbruch.
No Need To Be Fazed: Looking To FAZ
Risk-tolerant traders willing to bet on an outright decline for bank stocks can consider the Direxion Daily Financial Bear 3X Shares (NYSE: FAZ). FAZ attempts to deliver triple the daily inverse returns of the Russell 1000 Financial Services Index, which is not the same index tracked by XLF.
FAZ, like other leveraged ETFs, is best used as a short-term instrument and not as a buy-and-hold investment. FAZ could prove useful around Election Day and if the Fed disappoints on the rate hike front next month.
Disclosure: Todd Shriber owns shares of XLF.
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