4 ETFs to Short US Financial Stocks — Investor's Compass (2024)

US financial stocks have been getting crushed recently, and there are ETFs that can help you take advantage of this.

ETFs that short the US financial sector are designed to provide investors with inverse exposure to the financial sector, which means that they will benefit from a decline in the financial sector's stock prices. These ETFs are commonly known as inverse or short ETFs, and they use a variety of financial instruments to achieve their investment objective.

• This article will discuss 3 inverse ETFs you can consider buying for short exposure plus 1 non-inverse ETF to consider shorting.

1. ProShares Short Financials ETF (SEF)

One of the most popular ETFs that short the US financial sector is the ProShares Short Financials ETF (SEF). This ETF seeks to provide investors with daily inverse exposure to the Dow Jones U.S. Financials Index. The ETF uses derivatives such as futures and swaps to achieve its investment objective, and its performance is designed to correspond to the inverse of the index's daily performance.

As of right now, these are SEF’s top short holdings (below).

2. ProShares UltraShort Financials ETF (SKF) — 2X Leveraged

There are also leveraged inverse ETFs that aim to deliver even more pronounced returns by using a combination of leverage and short selling. For example, the ProShares UltraShort Financials ETF (SKF) seeks to deliver twice the inverse return of the Dow Jones U.S. Financials Index using a combination of short selling and leveraged instruments such as swaps and futures contracts. So, if the index is down 1% for the day, SKF should be up about 2%.

The holdings and sector weightings for this ETF are the same as the ETF above.

3. Direxion Daily Financial Bear 3x Shares ETF (FAZ) — 3X Leveraged

Another popular ETF that short the US financial sector is the Direxion Daily Financial Bear 3x Shares ETF (FAZ). This ETF is designed to provide investors with three times inverse exposure to the Russell 1000 Financial Services Index. Like the ProShares Short Financials ETF, FAZ uses derivatives to achieve its investment objective and is designed to deliver three times the inverse performance of the index.

As of right now, these are FAZ’s top holdings and sector weightings.

4. SPDR S&P Regional Banking ETF (KRE)

The SPDR S&P Regional Bank ETF is NOT an inverse ETF. However, we decided to include it for its exposure to regional banks, which have been getting hit the hardest. Since this isn’t an inverse ETF, you shouldn’t buy it if you’re bearish. Instead, you have to do things the old-fashioned way and short the ETF is you want bearish exposure.

KRE ETF seeks to provide exposure to the performance of regional banks in the United States. The fund holds a diversified portfolio of small- and mid-cap regional banks and aims to track the performance of the S&P Regional Banks Select Industry Index. These banks typically focus on a specific geographic area and offer a range of financial services, such as loans, deposits, and mortgages, to individuals and businesses in their communities.

Below are KRE’s top holdings:

The Dangers of These ETFs

While ETFs that short the US financial sector (i.e., the first three mentioned in the article) can provide investors with a way to hedge against a downturn in the financial sector, it's important to note that these ETFs are not suitable for everyone. Inverse ETFs can be more complex and riskier than traditional ETFs, and they require a deep understanding of the underlying index and the instruments used to achieve their investment objective.

Moreover, as these ETFs are designed to provide inverse exposure, their returns are likely to be negatively correlated with the broader market, which means that they may underperform during periods of market growth. Therefore, investors who choose to invest in ETFs that short the US financial sector should do so as part of a well-diversified portfolio that includes a mix of traditional and alternative investments.

Also, leveraged ETFs, such as SKF and FAZ, carry their own risks, which we explained in this article. Essentially, leveraged ETFs decay over time and can cause you to lose lots of money. Therefore, they’re more suitable for short-term trading. For example, here’s the long-term chart of FAZ. As you can see below, it has lost quite a bit of value over the years. You can see its share price used to be in the millions when adjusted for reverse stock splits. Now, it’s $24.03.

Conclusion

In conclusion, ETFs that short the US financial sector can provide investors with a way to gain inverse exposure to the financial sector, but they come with greater complexity and risk than traditional ETFs, especially leveraged ones. As with any investment, it's important to do your research before investing.