Profit From Bearish Financial Sector With Inverse ETFs

The recent stock market rout has led to sluggish trading in most of the sectors with financials being the worst hit. This is especially true as the S&P 500 Financial Sector Index is down 20% from its peak set in late January, putting it in bear market territory.

What Happened?

Though rising rates are good for the broader financial sector, an inverted yield curve (short-term rates are rising faster than the long term) is taking the shine off. The situation has raised worries about the health of banks and increased chances of default. As banks seek to borrow money at short-term rates and lend at long-term rates, they are earning less on lending and paying more on deposits, thereby leading to a tighter spread. This is restricting net margins and putting pressure on their profits.

The trend is likely to continue as global growth concerns and falling inflationary expectations led to dovish Fed. The central bank is expected to lift rates for the fourth time this year as soon as this week but may stall rate hikes next year. Powell recently said that interest rates were "just below" the level that would be neutral for the economy — meaning they will neither speed up nor slow down economic growth.

Additionally, sector fundamentals are also deteriorating due to growing concerns about increasing debt load on companies and governments, as well as a build-up of risk and diminished lending quality in the leveraged loan market. Further, banks, which are highly exposed to the energy sector, are once again seeing troubles due to a recent decline in crude oil prices.

Moreover, the ultra-popular Financial Select Sector SPDR Fund (XLF - Free Report) , with an asset base of around $24.2 billion and average daily volume of around 76.2 million shares, pulled out more than $2.6 billion from its asset base this quarter, according to data compiled by etf.com.

Given the massive outflow and the bearish outlook, the appeal for financial ETFs, especially banks, has dulled. As a result, investors who are bearish on the sector right now may want to consider a near-term short. Fortunately, with the advent of ETFs, this is quite easy as there are many options to accomplish this task. Below we highlight them and state how each stands out among the rest.

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