FAS ETF is a buy on rising interest rates

georgeclerk/E+ via Getty Images

Thesis

Direxion Daily Financial Bull shares 3x (NYSEARCA: SAF) seeks daily investment results equal to 300% of the performance of the Russell 1000 Financials Index. The Russell 1000 Financials Index (RGUSFLA) is a subset of the Russell 1000 that measures the performance of securities classified in the financial services sector of the large cap US stock market. A retail investor cannot invest directly in an index. With the Fed poised to raise rates at least four times in 2022, financials have benefited, making it one of UBS’s best sectors for 2022. With historic growth rotation at value unfolding before our eyes as rates normalize, the financials sector is a good fit for a rising rate cycle. FAS, due to its leveraged nature, is not a buy and hold vehicle for a retail investor. Think of the FAS as a surfboard that can currently be used to navigate through a year 2022 that will see a substantial hike in Fed risk-free rates and a historic shift from growth to value. Over the past year, FAS has indeed posted a stunning return of over 100%, but a savvy investor should bear in mind that the Covid-19 drawdown was -75% for this fund. We like the financials for 2022 and we like the FAS setup. We rate it a To buy on current market weakness with a target return of 25%. For the avoidance of doubt, we do not view the FAS as a buy and hold fund, but as a tool to be used for 2022 only with a short trading period in mind for the chosen target (i.e. i.e. less than 1 year).

Interest rates and financial data

We have now entered an interest rate tightening cycle where the Fed is expected to finally raise rates from historic lows:

federal funds

Federal Funds

the fed

Financials should benefit from a rising interest rate environment. Take the example of a commercial bank – the institution in its purest form of business model borrows money from consumers through deposits and lends to businesses and other individuals through loans and credit cards . As rates rise, said bank is able to increase the rate/yield it charges on its loans while enjoying the flexibility of not increasing rates for consumer deposit. The net profit he makes from loans compared to what he pays on deposits is called the net interest margin. Net interest margins generally increase as a central bank raises rates, thereby improving the profitability of financial institutions.

Higher rates also translate into higher profitability for more complex financial institutions such as investment banks and brokerage firms through various mechanisms such as margin lending charged, trade profitability and management fees cash for institutional transactions. Investment banks that typically cater to the cohort of institutional investors are typically large holders of cash for said institutional investors. When rates are low, investment banks earn no return on these holdings but have capital requirements around them. When rates go up, the bank suddenly realizes a cash return that they don’t always pass on to the client/institutional investor. The huge amount of cash and liquidity available in the financial system due to low rates can be seen in the shocking figure for the overnight reverse repo balance that swelled after Covid:

Reverse repo

ON Reverse Repo

The Fed

Assets

The Russell 1000 Index measures the performance of the large cap segment of the US equity universe. The Russell 1000 Financial Services Index measures the performance of Russell 1000 Index companies active in the banking, mortgage finance, consumer finance, specialty finance, investment banking and financial services sectors. brokerage, asset management and custody, corporate lending, insurance, financial and real estate investments. domain. The current top holdings of the index are:

fact sheet

Top holdings in the index

Fund Fact Sheet

The top ten holdings in the index currently represent over 47% of the holding weights. The index is currently biased towards banks, with an allocation above 36% for this sub-sector:

weights

Index sector weightings

Fund Fact Sheet

Performance

Looking back one year, the ETF posted a strong performance of 108%:

1 year

1 year performance

Looking for Alpha

In 2022, the FAS was already up more than 16% before the recent market sell-off:

return 2022

2022 performance

Looking for Alpha

A retail investor should not mistake this as a buy and hold vehicle. It’s not. FAS is currently riding the cyclical trade that favors financials in a rising interest rate environment. When the macro cycle turns into a recession and a bear market, the FAS can lose value at shocking speed:

withdrawal

FAS direct debits

Portfolio Viewer

During the Covid market crash, FAS saw a -75% decline. Any financial instrument that exceeds a -50% drawdown is not a buy-and-hold security in our minds, and a retail investor should be very careful in navigating the macrocyclical environment when holding such instruments. financials in its portfolios.

Conclusion

A leveraged instrument The FAS is not a buy-and-hold fund but rather a cyclical “surfboard” that can be used by a savvy investor in the economic cycle. We are now entering a tightening rate environment which should benefit financials via increased earnings from net interest margins. Although the current market slump may linger a bit longer, a savvy investor can choose a good entry point into the FAS. We assess FAS at To buy with a return target of 25%.

About Myra R.

Check Also

Yen jumps after authorities intervene for first time since 1998

Join now for FREE unlimited access to Reuters.com Register TOKYO/LONDON, Sept 22 (Reuters) – The …