Yesterday, put buyers betting on downside for the financials appeared in XLF (SPDR Financial Select Sector, Expense Ratio 0.15%), snapping up the December 19 strikes in the marketplace.
Downside put buying has been a familiar theme all week not only in XLF for example, but largely in the broad based SPY (SPDR S&P 500, Expense Ratio 0.09%), with most of that trading concentrating in November options.
Financials are of course the second largest weighted industry sector within the S&P 500 at 15% behind a 19% weighting in Technology, so the message here in an increased appetite for downside protection not only in November (Presidential Election uncertainty?), but also going into year’s end with what may be FOMC Rate Decision uncertainty.
XLF has not traded as low as $19 since late September, and that dip was a very brief stay, as the fund rallied right up until core earnings season for most of the group. Today XLF is hovering right in around its 50 day moving average, and apparently the December put buyers believe that a significant pullback from even these levels is possible. It is important to note that two stocks make up more than 21% of the underlying portfolio of XLF, BRK.B (11.18%) and JPM (10.20%), and neither chairman, Warren Buffett nor Jamie Dimon, have made their political leanings going into next week’s Presidential Election a mystery, but in fact have been very public about whom they favor here as members of the Democratic political party.
The third largest holding inside of XLF is WFC (8.52%) which is off of its early October lows, but the stock has still largely struggled on negative headlines and the resignation of CEO John Stumpf amid congressional inquiries.
XLF is of course the largest Financial Equity based ETF in the U.S. listed landscape at $12.8 billion in assets under management, but it has had a hard time in 2016 in terms of fund flows, losing $3.8 billion to redemption flows thus far. We have spoken about this before because the most recent options flows in XLF consisting of put buyers is not a new theme. That said, we are also closely monitoring several “Bear” funds in this space as we would expect the demand for such products to rise, given what looks like bearish sentiment in the sector.
These funds include FAZ (Direxion Daily Financial Bear 3X, Expense Ratio 0.95%), SKF (ProShares UltraShort Financials, Expense Ratio 0.95%), and SEF (ProShares Short Financials, Expense Ratio 0.95%), to name a few.
Disclaimer: The content of this article is excerpted from a daily newsletter from Street One Financial. While ETF Daily News may edit the contents and add a relevant title to the piece, the author, Paul Weisbruch, does not endorse or recommend any issuer or security mentioned herein.
Paul has been actively involved in the ETF space from both a product and trading standpoint since 2000. Additionally, Paul has well forged relationships with national RIAs, institutional pension fund managers and consultants, mutual fund and hedge fund managers, and also the ETF media. Co-authoring the “S1F ETF Daily” since 2009, the daily piece has become a must for many portfolio managers in the ETF space, with segments regularly appearing in the likes of Barron’s, WSJ, and ETFTrends.com for instance.
He holds his Series 4 (Registered Options Principal), 6, 7, 55 (Equity Trader), 63, and 65 licenses. He graduated from the University of Pittsburgh (B.S. – Economics), graduating magna cum laude, and has an MBA from Villanova University.