At the beginning of 2018, optimism for the financials sector was reasonably high. A tax reform plan touted by President Trump had been passed in late 2017, with the effects due to impact the economy beginning in 2018. Unfortunately, throughout 2018 the banks, real estate funds and other companies which make up the financials sector were slammed by a series of strong headwinds. A Republican-led Congress did not do as much to deregulate the financial industry as some investors would have expected or hoped for, putting a damper on financials stocks performance. What's more, nearly every financials stock took a significant hit in the final weeks of the year as well. During this volatile time, the entire market fell precipitously heading into 2019, ending 2018 with the worst overall performance since the 2008 financial crisis.
Investors focused on exchange-traded funds (ETFs) which target the financials sector generally didn't find much to celebrate at the end of 2018 either. This is unsurprising, as these ETFs, which track indexes of financials stocks based on various strategies and criteria, tend to perform poorly when their underlying stocks do so as well. Nonetheless, there were a handful of financials ETFs which managed to not only stave off declines for 2018, but in fact earned significant returns for the year.
Below, we'll look at the top five financials ETFs by overall returns for 2018. Each of these ETFs is a fund that shorts (or bets against) the financials space. We'll compare each of these funds to the S&P 500 Financials Index as a benchmark.
1. Direxion Daily Regional Banks Bear 3X Shares ETF (WDRW)
ETF returns for 2018: +56.8% (vs. -14.6% for benchmark)
2. ProShares UltraPro Short Financial Select Sector ETF (FINZ)
ETF returns for 2018: +32.1% (vs. -14.6% for benchmark)
3. Direxion Daily Financial Bear 3X Shares ETF (FAZ)
ETF returns for 2018: +15.9% (vs. -14.6% for benchmark)
4. ProShares UltraShort Financials ETF (SKF)
ETF returns for 2018: +15.7% (vs. -14.6% for benchmark)
5. ProShares Short Financials ETF (SEF)
ETF returns for 2018: +9.78% (vs. -14.6% for benchmark)
Direxion Daily Regional Banks Bear 3X Shares ETF
With overall returns of nearly 57% for 2018, the Direxion Daily Regional Banks Bear 3X Shares ETF (WDRW) claims the top spot among financials funds for 2018. However, like many other funds offering inverse exposure to the sector, WDRW is not intended for long-term investments. This is because WDRW is rebalanced daily, so returns over a period longer than a single trading day tend to be skewed. In this sense, considering the fund's overall performance for the entire year is perhaps somewhat artificial. WDRW offers leveraged, -3x exposure to an index of U.S. regional banking stocks which are weighted equally.
WDRW was launched in August of 2015 and carries an expense ratio of 1.07%. It has assets under management of roughly $2.26 million, making it a small fund.
ProShares UltraPro Short Financial Select Sector ETF
The ProShares UltraPro Short Financial Select Sector ETF (FINZ) returned just over 32% for 2018, earning it the second-highest spot on our list. Like WDRW, FINZ offers -3x exposure, and it is also rebalanced daily. However, while WDRW focuses on regional banking names, FINZ focuses on the S&P Financial Select Sector Index, which is a group of U.S. financials companies weighted by market cap. Owing to the use of leverage, FINZ performs exceptionally well on days whenn the index declines significantly. As such, FINZ spiked toward the end of 2018 as the overall market sank.
FINZ was launched in July of 2012 and carries an expense ratio of 0.95%. It is a very small fund, with just $1.57 million in its asset base.
Direxion Daily Financial Bear 3X Shares ETF
Another -3x fund rounds out the top three overall returners from the financials sector for 2018. The Direxion Daily Financial Bear 3X Shares ETF (FAZ), which returned 15.9% overall for the year, offers -3x exposure to the Russell 1000 Financial Services Index. This index is a subset of the popular Russell 1000 Index and tracks large-cap financials companies. One aspect of FAZ that sets it apart from its -3x competitors above is its asset base; with $173 million or so in assets under management, FAZ has stronger investor interest than either of the above funds.
FAZ was launched in November of 2008 and carries an expense ratio of 1.10%.
ProShares UltraShort Financials ETF
The next financials ETF on our list is similar to those in the top three positions, although it offers less by way of leverage. The ProShares UltraShort Financials ETF (SKF) offers -2x exposure to the Dow Jones U.S. Financials Index. This is a market-cap-weighted index of financial firms which include many of the largest companies in the U.S. banking and investment spaces. Like the funds above, SKF rebalances its exposure daily, making it a popular short-term trading vehicle. SKF returned 15.7% for 2018.
SKF launched in January of 2007 and carries an expense ratio of 0.95%. It is a relatively small fund, with just $31.73 million in assets under management as of this writing.
ProShares Short Financials ETF
The final financials fund on our list is another bearish offering from ProShares. The ProShares Short Financials ETF (SEF) operates almost identically to SKF, the primary distinction being that it does not employ leverage. Rather, SEF provides daily inverse exposure to the Dow Jones U.S. Financials Index. Investors typically buy and sell SEF over the time period of a single day, but an investor who held on for the entire year would have seen overall returns of 9.78%.
SEF launched in June of 2008 and carries an expense ratio of 0.95%. It has just under $20 million in its asset base as of this writing.