Regional Bank Melt-Up: Is This 3X Leveraged Play the Ultimate High-Reward Bet?

Regional banks are an interesting niche of the larger financial sector. In many ways, there's no need for regionals bank at all because there are plenty of large, national banks. And yet there's a long history of regional banks thriving, surviving, and often growing via acquisition.

Once big enough, regional banks sometimes get swallowed up by large national banks. There's a reason why investors may find regional banks attractive. However, is it a good move to buy a leveraged regional bank exchange-traded fund (ETF) like Direxion Daily Regional Banks Bull 3X Shares (NYSEMKT: DPST)?

What does Direxion Daily Regional Banks Bull 3X Shares do?

Direxion Daily Regional Banks Bull 3X Shares tracks the S&P Regional Banks Select Industry Index. However, the real story is that it uses complex investment techniques to produce a return that is 300% higher than the index's return for a single day. On the ETF's website, "for a single day" is bolded and italicized for emphasis.

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There are really two big risks to consider here. First, as you probably know very well by now, stocks go up and down. So the 300% works in both directions. If regional banks are rallying, you will make a lot of money. If these bank stocks fall into their own personal bear market phase, you will lose a lot of money. The only way to avoid that is to jump in and out of Direxion Daily Regional Banks Bull 3X Shares. That, however, would be tantamount to market timing, a high-risk approach most investors should avoid.

The second big factor to consider is the ETF's time-related goal. It is only looking to provide 300% of the index's return on a single day. That runs into a math problem when stocks are falling. A 50% decline in a stock price requires a 100% return to get back to breakeven. That's a very big hole to fill. Holding Direxion Daily Regional Banks Bull 3X Shares is unlikely to be as profitable as you expect, given the daily goal.

Only for the most aggressive investors

To invest in regional banks, you need to have a constructive view of the sector. Regional banks, as a group, are up 12% over the past year, so there's a reason to be positive. However, Direxion Daily Regional Banks Bull 3X Shares' goal of 300% of the return of regional banks is like investing on steroids. Only the most aggressive investors should try it, noting that over the past year, the ETF is only up 6%. That's way less than the 36% you might have expected given the ETF's name.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.