Investors Bulk Up On Bank ETFs And Options
Summary The markets anticipate the Federal Reserve will hike interest rates some time this year. Financial sector ETFs could outperform in a rising rate environment. More investors are shifting money into financial sector ETFs. By Todd Shriber & Tom Lydon Concerns that the Federal Reserve is close to raising interest rates are of no concern at all for investors in financial services exchange traded funds, one of the most prolific asset-gathering corners of the ETF space in recent months. Rising Treasury yields have been a driving force behind financial services sector ebullience. Put simply, interest rates play a significant role in investors’ attitude toward bank stocks and ETFs. Investors are responding by pouring into ETFs such as the Financial Select Sector SPDR ETF (NYSEARCA: XLF ) and the corresponding bullish options. “For every 100 bullish contracts on the Financial Select Sector SPDR Fund, 112 puts were outstanding. That’s near the highest ratio since 2012, data compiled by Bloomberg show. Options protecting against a 10 percent drop in the ETF cost 6.16 points more than calls betting on a 10 percent rise, three-month data show. The spread, known as skew, reached 5.07 on June 16, the lowest since July,” reports Lu Wang for Bloomberg . XLF, the largest financial services ETF, has hauled in $811.5 million in new assets this month, after adding nearly $545 million in new assets last month. Inflows to financial services ETFs, including XLF, arrived after professional investors shunned the sector in the first quarter . The May flows to bank ETFs are interesting when accounting for seasonal trends, which highlight June weakness for the financial services sector. On a historical basis, XLF is the worst of the nine SPDRs in the sixth months of the year. Wells Fargo (NYSE: WFC ), Warren Buffett’s Berkshire Hathaway (NYSE: BRK.B ) and Dow component JPMorgan Chase (NYSE: JPM ) combine for over a quarter of XLF’s weight. “The Fed will raise rates for the first time since 2006 in September and lift them to at least 1.5 percent next year, according to the median forecast of more than 50 economists in a Bloomberg survey,” according to the news agency. Although money has been piling into ETFs like XLF in recent months, investors have taken a more muted approach to leveraged equivalents. For example, the ProShares Ultra Financials ETF (NYSEARCA: UYG ) , the double-leveraged answer to the iShares U.S. Financial Services ETF (NYSEARCA: IYG ) , has not added any new money this month. The Direxion Russel 1000 Financials Bullish 3X ETF (FAS ) , which attempts to deliver triple the daily returns of the Russell 1000 Financial Services Index, has added over $8 million this month. FAS and UYG are up 4.5% and 3.3%, respectively, over the past month. Direxion Russel 1000 Financials Bullish 3X ETF (click to enlarge) Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.