Learn about some of the leveraged exchange-traded funds (ETFs) that investors can use to track the banking industry within the financial sector.
Second-quarter earnings season starts next week with the quarterly kick-off ritual of reports from the major investment and money center banks.What HappenedWith the arrival of each bank earnings season comes opportunity with either the Direxion Daily Financial Bull 3X Shares (NYSE: FAS) and/or the Direxion Daily Financial Bear 3X Shares (NYSE: FAZ).The bullish FAS tries to deliver triple the daily returns of the Russell 1000® Financial Services Index while the bearish FAZ, which is higher by 9.16% over the past month, attempts to deliver triple the daily inverse performance of that benchmark.Why It's Important View more earnings on FASBanks faced an array of headwinds in the first half of 2020, including declining interest rates, rising loan loss reserves and the mandate from the Federal Reserve that buybacks be scuttled and dividend hikes be put on hold."Goldman analyst Richard Ramsden is more bearish, projecting earnings off 69% compared with last year. On the plus side, with the exception of Wells Fargo (NYSE: WFC), which he believes will report a quarterly loss, banks are apt to avoid dividend cuts," reports Barron's. "Still, banks will be hurt by higher reserves, which he expects to hit $32 billion, 27% over last quarter."Reading through the tea leaves of that assessment, it would appear that the bearish FAZ has a chance to shine this earnings season. Potentially bolstering the case for FAZ is that bank stocks, though still inexpensive relative to the broader market, aren't quite the value plays they were 12 months ago. "Even with the recent increase in stock prices, the median North American financial sector stock still trades at an 11% discount to its fair value estimate but below a 30% discount a quarter ago," according to Morningstar. "With our assessment that many financial sector stocks are less undervalued than they were a quarter ago, investors should be much more discerning of which stocks they choose and cognizant of the risks they're taking."What's Next Something else to consider when it comes to the FAS/FAZ decision is that the Russell 1000 Financial Services Index isn't a bank-specific benchmark. It includes insurance providers and asset managers, among others and some of those companies aren't all that inexpensive, either."Outside of banks, we see fewer bargains in the financial sector. The investment-management firms we considered undervalued at the end of the first quarter are mostly fairly valued after the run in the stock market," notes Morningstar. "The median North American insurer we cover also trades at around an only 8% discount to its fair value estimate, which is a relatively small margin of safety, given the insurance industry's exposure to interest rates, asset prices, and tail risk of large insurance claims from the pandemic."See more from Benzinga * Good News For This Leveraged ETF: Bank Dividends Are Still At Risk * Murky Dividend Picture Puts Bearish Bank ETF In The Spotlight(C) 2020 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
On June 25, the Federal Reserve will release the results of the Comprehensive Capital Analysis and Review (CCAR), also known as the stress test. In advance of that release, some market observers are getting jittery about the fate of bank dividends.What HappenedThe CCAR is many things, but the primary view of it in the investment community is that it's the Federal Reserve's permission slip for the largest banks to pay dividends and repurchase shares. Using the Direxion Daily Financial Bull 3X Shares (NYSE: FAS), the dominant name among leveraged financial services exchange traded funds, as the guide, it appears traders are betting the Fed won't force banks to cut dividends.Over the past week, FAS, which attempts to deliver triple the daily returns Russell 1000 Financial Services Index, is higher by 13.45%. That's not the type of performance one would expect out of a leveraged ETF addressing a sector that could soon deliver bad news.Why It's Important FAS's bearish counterpart - the Direxion Daily Financial Bear 3X Shares (NYSE: FAZ) - is still worth considering. In fact, options market data confirm as much. There, traders are wagering JPMorgan Chase (NYSE: JPM), among other components in the Rusell 1000 financial benchmark, will cut payouts.Several, including JPMorgan, have already eliminated buybacks. Some analysts are speculating that if the Fed requires banks to boost loan loss reserves, JPM, Citigroup (NYSE: C), Goldman Sachs (NYSE: GS) and more will be forced to reduce dividends. That's bad news for common stock investors, but potentially great news for the bearish FAZ. Plus, FAZ has some history on its side."Ahead of the 2008 financial crisis, options traders accurately bet that Citigroup would be forced to cut its dividend, which it eventually did, slashing it to a penny in 2009," according to CNBC.What's NextAssuming the Fed does what options markets are expecting and mandates banks lower payouts, FAZ could be for quite a run. With dividend growth off the table, there's almost no reason to own a value sector that needs higher interest rates to flourish.That is to say why bet on banks or FAS when growth stocks are in favor and interest rates are low. Traders have added $260.25 million to the bearish FAZ just this quarter and that could be a tell unto itself.See more from Benzinga * Left For Dead Bank Stocks Perk Up, Lifting Volatile ETF Along The Way(C) 2020 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.