As interest rates rise, take advantage of the strength of the financial sector



The Federal Reserve has previously signaled that it plans to hike rates in 2022, which means opportunities to increase transactions within the financial sector using the Direxion Daily Financial Bull 3X ETF (FAS).

An improving economy means the Fed is no longer inclined to maintain its stimulus measures, such as easy money. Rising rates may not be a good thing for consumers, but for the financial sector (banks in particular) who depend on lending products, it could be good for their bottom line.

The improving economy also drives up yields, which has sprayed the equity market with volatility. The financial sector, however, has been able to mitigate the effects of much of this situation.

“Heightened optimism about the strength of the economy pushed Treasury yields higher after last week’s FOMC meeting. In response, mortgage rates increased for all types of loans, with the 30-year benchmark fixed rate reaching its highest level since early July 2021 ”, noted Joel Kan, associate vice president of economic and industrial forecasting at the MBA.

FAS seeks daily investment results, before fees and expenses, of 300% of the daily performance of the Russell 1000® Financial Services Index. The fund invests at least 80% of its net assets in financial instruments and index securities, ETFs that track the index and other financial instruments that provide daily leveraged exposure to the index or to ETFs that track the index.

The Index is a subset of the Russell 1000® Index which measures the performance of securities classified in the financial services sector of the US large-cap stock market. According to Morningstar figures, the fund is up 90% over the year.

Hot housing sector

Rising interest rates mean, however, that demand for mortgages could slow down, but this should be offset by a boiling real estate sector. Prices continue to appreciate and higher asking prices could result in larger purchase loans to offset lower demand in refinancing activities.

“As home price appreciation continues to rise, increasing by more than 19% per year in July, larger loan applications continue to outpace lower balance loans. The average loan amount for a requisition reached $ 410,000, its highest level since May 2021, ”Kan said.

However, for bears that might feel weak, there is the Direxion Daily Financial Bear 3X ETF (FAZ). Taking the opposite side of FAS, FAZ looks for daily investment results that are 300% of the inverse (or opposite) of the daily performance of the Russell 1000® Financial Services Index.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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