In theory, the financial services sector, the second-largest sector exposure in the S&P 500, should be a decent performer this year. The reality is something else, as the largest pure beta ETF addressing the sector is down 4.6% year-to-date as of June 8.
With the U.S. economy on solid ground and investors largely at peace with credit quality, the sector should be delivering for investors. Clearly, it isn’t. However, that scenario may open the door for tactical traders to capitalize, with either the Direxion Daily Financial Bull 3X ETF (FAS ) or its bearish relative, the Direxion Daily Financial Bear 3X ETF (FAZ ).
The bullish FAS attempts to generate daily returns corresponding to 300% of the widely followed S&P Financial Select Sector Index. Meanwhile, the bearish FAZ’s objective is 300% of the daily inverse returns of that index. It’s on traders to decide which one of those ETFs offers the best near-term opportunity, with the sector positioned as a split decision at the moment.
“The puzzle is that, on balance, the economy is doing fine, and at this point, there don’t seem to be major red flags for credit quality,” noted Morningstar’s Tom Lauricella. “That’s even considering the so-called K-shaped economy, wherein middle- and lower-income consumers are feeling the strain of inflation while higher earners benefit from the bull market in stocks.”
Exploring FAS, FAZ Opportunity
Perhaps not surprisingly, investors have sold off some of the stocks in the S&P Financial Select Sector Index, amid fears that artificial intelligence (AI) could adversely impact those companies. However, some market observers consider the case overstated. That could be a sign for traders to examine the bullish FAS.
“Beyond that, I have seen these names respond negatively to concerns that the labor market could see pressure from AI disruption—not 100% unreasonable—or from agentic payments disrupting card networks—which I’m really skeptical of,” observed Morningstar’s Michael Miller.
On the other hand, it pays to remember that the index FAS and FAZ track isn’t a bank-specific gauge. Rather, it’s a broad benchmark of financial services equities and there are some corners where AI risk is credible, potentially signaling opportunity with the bearish FAZ.
“A lot of financial services sectors are ‘advice-driven,’ so if you’re bullish on AI and expect the cost of knowledge to decline precipitously, financial services are probably not where you’d want to hide. This would be why sectors as diverse as commercial real estate brokerage, wealth management, financial data, and insurance brokerage have been hit,” added Miller.
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