How to Profit From Banking Carnage With Inverse ETFs
The financial sector has seen the worst decline following the collapse of two banks, spreading fears across the globe. The ultra-popular Financial Select Sector SPDR Fund XLF, with an asset base of around $39.3 billion and an average daily volume of around 44.9 million shares, pulled out more than $532 million from its asset base in a week, according to data compiled by etf.com. The ETF is down 10.1% (read: Bank ETFs Tumble on Silicon Valley Bank Carnage).
Given the half-million outflow and deteriorating fundamentals, the appeal for financial ETFs, especially banks, has dulled. As a result, investors bearish on the sector right now may want to consider a near-term short. Fortunately, with the advent of ETFs, this is quite easy, as there are many options to accomplish this task.
Inverse ETFs like MicroSectors U.S. Big Banks Index -3X Inverse Leveraged ETN BNKD, Direxion Daily Financial Bear 3x Shares ETF FAZ, ProShares UltraShort Financials ETF SKF, and ProShares Short Financials ETF SEF have gained handsomely over the past week and could be worth buying for huge gains in a short span arising from the bearish trend in the sector.
These ETFs provide opposite exposure which is a multiple (-1X, -2X or -3X) of the performance of the underlying index using various investment strategies, such as swaps, futures contracts and other derivative instruments. These funds make a profit when financial stocks decline and are suitable for hedging purposes against the fall of these stocks.
What Happened?
The bank turmoil started with the collapse of the Silicon Valley Bank, a firm that specializes in venture-capital financing, when it took steps to shore up its capital position. It is regarded as the biggest bank failure since Washington Mutual in 2008.
Silvergate Capital Corp., one of the crypto market’s top banks, also collapsed and accelerated the selloff. The California bank said that it plans to shut down its operations and liquidate after the crypto industry’s meltdown sapped the company’s financial strength. The failure of the two banks have raised concerns that soaring interest rates are eroding balance sheets across the financial industry (read: 3 ETF Areas Likely to be in Tight Spots Post Banking Crisis).
Signature Bank also joined the league and closed its door on Mar 12, after regulators said that keeping the bank open could threaten the stability of the entire financial system. Then, Credit Suisse, the second-largest Swiss lender, aggravated the concerns, sparking a fresh selloff in the banking sector. Shares of Credit Suisse fell as much as 30% to an all-time low on Mar 15 after its largest shareholder ruled out any more investment in the bank.
The combination of bad news has raised concerns about higher deposit costs, weakening loan demand, potentially weakening the credit cycle and leading to weakness in the commercial real estate markets. The sector has been witnessing downward pressure after KeyCorp warned about elevated deposit betas early this month. Further, the carnage might compel Fed to be less aggressive in the meeting.
Overall, the sector fundamentals are deteriorating due to the increasing debt load on companies and governments, as well as a build-up of risk and diminished lending quality in the leveraged loan market. Further, banks, which are highly exposed to the energy sector, are once again seeing troubles due to a recent decline in crude oil prices.
MicroSectors U.S. Big Banks Index -3X Inverse Leveraged ETN (BNKD) – Up 41.3%
MicroSectors U.S. Big Banks Index -3X Inverse Leveraged ETN seeks to offer three times inverse leveraged exposure to the Solactive MicroSectors U.S. Big Banks Index. The benchmark includes 10 U.S. stocks in the banking sector with the largest free-float market capitalization in equal weights (read: Should You Buy the Dip in Big Bank ETFs Amid SVB Crisis?).
MicroSectors U.S. Big Banks Index -3X Inverse Leveraged ETN has accumulated $14.3 million in its asset base. It charges 95 bps in annual fees and trades in an average daily volume of about 78,000 shares.
Direxion Daily Financial Bear 3x Shares ETF (FAZ) – Up 26%
Direxion Daily Financial Bear 3x Shares ETF provides three times inverse exposure to the Financial Select Sector Index, charging investors 95 bps in annual fees. It is extremely popular with AUM of $258.7 million and trades in heavy volume of around 3 million shares.
ProShares UltraShort Financials ETF (SKF) – Up 13.8%
ProShares UltraShort Financials ETF (SKF) seeks two times leveraged inverse exposure to the Dow Jones U.S. Financials Index, charging 95 bps in fees. It has amassed $26.4 million in its asset base and trades in a moderate volume of around 70,000 shares per day on average.
ProShares Short Financials ETF (SEF) – Up 6.8%
ProShares Short Financials ETF provides unleveraged inverse exposure to the daily performance of the Dow Jones U.S. Financials Index. It has amassed $29.9 million in AUM while volume is moderate at around 89,000 shares. The expense ratio comes in at 0.95%.
Bottom Line
As a caveat, investors should note that such products are suitable only for short-term traders as these are rebalanced on a daily basis.
Still, for ETF investors who are bearish on the financial sector for the near term, either of the above products could make an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance, and a belief that the “trend is the friend” in this corner of the investing world.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Financial Select Sector SPDR ETF (XLF): ETF Research Reports
Direxion Daily Financial Bear 3x Shares (FAZ): ETF Research Reports
Proshares Short Financials (SEF): ETF Research Reports
ProShares UltraShort Financials (SKF): ETF Research Reports
MicroSectors U.S. Big Banks Index -3X Inverse Leveraged ETNs (BNKD): ETF Research Reports
