Fourth-quarter earnings season kicks off on Friday, and traders will be treated to the usual avalanche of earnings updates from financial services firms early in the reporting cycle.
Short-term events such as earnings reports are the ideal occasions for leveraged exchange-traded funds. That includes the Direxion Daily Financial Bull 3X Shares (NYSE: FAS) and the Direxion Daily Financial Bear 3X Shares (NYSE: FAZ), the dominant names among leveraged financial services ETFs.
FAS attempts to deliver triple the daily returns of the Russell 1000 Financial Services Index, while FAZ tries to deliver triple the daily inverse returns of that benchmark.
“Leveraged and inverse ETFs pursue daily leveraged investment objectives, which means they are riskier than alternatives that do not use leverage,” according to Direxion. “They seek daily goals and should not be expected to track the underlying index over periods longer than one day.”
FAS and FAZ will likely see some volatility this week as two of its top 5 holdings, JP Morgan Chase & Co. (NYSE: JPM) and Wells Fargo & Co (NYSE: WFC), report earnings. Those two companies make up over 10 percent of the index.
A Financials Bull
“The financials sector is expected to report the third-highest earnings growth of all 11 sectors at 16.7 percent,” according to FactSet research. “At the industry level, all five industries in the sector are projected to report double-digit earnings growth: diversified financial services (31 percent), insurance (30 percent), banks (14 percent), consumer finance (12 percent) and capital markets (12 percent).”
The Russell 1000 Financial Services Index allocates over 30 percent of its weight to bank stocks, while capital markets firms and insurance providers each hold weights of more than 14 percent.
Data suggest traders are comfortable betting on a stellar earnings season for FAS. The leveraged financials ETF has averaged over $1.7 million of inflows over the past month, according to issuer data.
The Tax Impact
The Trump administration's tax reform effort was widely cited as a catalyst for the financial services sector, but it will cost some big banks in the near-term. JPMorgan, Bank of America Corp. (NYSE: BAC) and Goldman Sachs Group Inc. (NYSE: GS) are among the major banks that recently announced fourth-quarter charges related to the the new tax policy.
Those banks account for over 13 percent of the Russell 1000 Financial Services Index. Over the past month, FAZ has averaged daily inflows of nearly $129,000.
To start 2018, volume has been light in FAZ, a situation that is likely to change as earnings reports start rolling in.
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