When it comes to banks, investors lean on ETFs

When it comes to banks, investors lean on ETFs

Stock Market Predictions

NEW YORK (Global Markets) - Bank stocks are fraught with peril, but investors are putting heavier bets on the sector than any other due to potential profits.

The banks have been a prime trading ground for investors reacting to shifting sentiment in Europe and the United States. More and more, they're coming through macro bets, using big exchange-traded funds that have dominated the action of late.

While specific companies are often the favored trading vehicle -- Bank of America is almost always the most active name among U.S. listed issues -- exchange-traded funds are increasingly the choice for investors playing the group.

The Financial Select Sector SPDR is frequently the second-most traded ETF, behind only the SPDR S&P 500, which holds all the components of the S&P 500.

Average daily volume over the past 50 days for the XLF is about 39.3 million, higher than such issues as BofA (36.7 million) General Electric Co (14.4 million) or Citigroup Inc (10.3 million).

The sector is especially sensitive to any news coming from the euro zone, given uncertainties about the region's balance sheets and how weakness on the continent could impact domestic profits. The concerns have pushed share prices down, creating a tug-of-war with bulls who feel the sector has become oversold.

October volume in the XLF is 44 percent greater than the same time a year ago, even with six more trading sessions remaining.

"Volume is surging because investors have vastly different opinions on the sector," said Paul Justice, director of North American ETF research at Morningstar in Chicago.

"With banks, investors are constantly dealing with large issues that could go either way, so they're casting votes of different magnitudes in different directions. There's high volume because there's high volatility, and a great deal of short interest as well."

Those bets of different magnitude are frequently concentrated in leveraged ETFs. The Direxion Daily Financial Bull 3X Shares, a triple-leveraged fund that tracks the Russell 1000 Financial Services index, is regularly one of the top 10 in terms of activity among U.S. issues.

The fund's 50-day moving average of 11.3 million shares is higher than Citigroup's and only slightly less than JPMorgan's 11.6 million average.

Volume in the FAS fund has followed a similar path as the XLF's, surging since the start of August. On October 4, 20.09 million shares traded, the heaviest day of trading since May 21, 2010.

Direxion's bear equivalent, an inverse triple-leveraged financial fund, is less traded, with a 50-day average of about 3.9 million, though it has also grown more active in recent weeks.

Recent results from the banks have been mixed. Because of that, investors have been using sector plays to avoid company-specific issues.

"ETFs are a way for people who have a view of a sector rather than specific companies to play the trade," said Michael Iachini, managing director of ETF Research at Schwab in Denver.