Direxion's FAS, FAZ ETFs Rise To The Forefront Amid Monetary Policy Shift

While the market’s attention has largely concentrated on major headlines such as the blistering technology ecosystem, the Federal Reserve’s shifting stance on monetary policy deserves careful consideration. Last month, the central bank cut its benchmark interest rate by 25 basis points, thus delivering a widely expected move that ended a nine-month policy pause. Moving forward, the decision may have significant implications for financial enterprises.

With the reduction in borrowing costs, the underlying environment would likely exacerbate inflation — which is already a challenge for both consumers and various industries. Unsurprisingly, gold has been skyrocketing, benefiting directly from safe-haven demand. Furthermore, experts like market veteran Ed Yardeni believe that gold could reach $5,000 by sometime next year and possibly $10,000 by 2030.

Yardeni isn’t alone in his bullishness, with economist Peter Schiff chiming in with an ultimate upside target of $20,000 for the yellow metal. Undergirding much of the optimism is the concept that the relative value of the U.S. dollar will keep declining. As such, gold should rise higher, presenting an intriguing dynamic for financial stocks.

In the near term, a dovish monetary policy may be bearish for finance-related industries due to net interest margin compression. Because banks earn money on the spread between what they pay depositors and what they charge borrowers, a lower Fed rate would narrow this delta. Subsequently, the compression may reduce net interest income, which is a core profit driver for most banks.

Perhaps unsurprisingly, the Financial Select Sector Index has slipped more than 2% in the trailing month. Also, on a year-to-date basis, the index is up only 9%, thus conspicuously underperforming the benchmark S&P 500.

On the other hand, an accommodating monetary policy could be bullish for certain growth sectors, which in turn could bolster the fiscal print of various financial institutions. What’s more, lowered costs of borrowing should be bullish for loan demand due to the stimulus effect of reduced barriers. Thus, in the long run — assuming proper navigation by the Fed, among other factors — dovishness could be a net positive for the financial sector.

The Direxion ETFs: Thanks to the underlying sector’s kinesis, traders who wish to speculate on either side of the fence can do so with Direxion’s ultra-leveraged exchange-traded funds. For the optimists, the Direxion Daily Financial Bull 3x Shares (NYSE:FAS) provides a platform for those with maximum upside conviction. On the other end, the pessimists may consider the Direxion Daily Financial Bear 3x Shares (NYSE:FAZ).

Both ETFs track the performance (or inverse performance) of the Financial Select Sector Index. Of course, as 300%-leveraged instruments, traders must exercise extreme caution and discretion before participating. While the gains can be incredibly robust, the losses can be just as steep.

Primarily, the purpose of the FAS and FAZ ETFs is to deliver a convenient mechanism for speculation. With 3X funds, traders can sidestep the options market for their leveraged or bearish wagers. ETF shares (or units to be more precise) trade much like a standard publicly traded security. This familiar process helps mitigate the learning curve.

Aside from the extreme market risk, though, prospective participants should note that leveraged and inverse ETFs — especially the 3X variety — should never be held for a period longer than one day. Structurally, the reason is volatility erosion, with returns likely to deviate from expectations due to the daily compounding effect.

The FAS ETF: Since the start of the year, the FAS ETF has gained nearly 10%. In the trailing six months, the bull fund swung up almost 44%.

• While the overall trend has been strong for the FAS ETF, the bull fund has encountered heavy resistance, which is worrying.
• Right now, the price action sits just above the 200-day moving average but below the 50 DMA. Thus, the bulls must regain control here to prevent additional technical damage.

The FAZ ETF: On the other side of the table, the FAZ ETF declined by roughly 33%. In the past half-year period, the inverse fund is down 36%.

• Although momentum has been weak throughout this year, the FAZ ETF has demonstrated signs of life recently.
• The price action has marched above its 50 DMA and 20-day exponential moving average. Volume has also been rising in the past several sessions.

Featured image by Pixabay.com.