Banking Profits in Financial ETFs

The "Trump bump" sent financial stocks on a 14-month rally as Wall Street cheered the President's election promises to slash company taxes, reduce regulation and ease strict bank lending rules. The euphoria surrounding the financial sector came to an end in early 2018 as investors felt that most of the positive news had been factored in and focused their attention on other sectors poised to benefit from a healthy economy – namely technology.

However, financial stocks are well positioned to finish the year on a positive note. The economy remains strong, interest rates are on an upward trajectory, merger and acquisition activity is plentiful and there are discussions about further regulatory relief, particularly for midsize banks. When referring to banking stocks, Michael Bapis, managing director with Vios Advisors at Rockefeller Capital Management, told CNBC's "Trading Nation" program, "They're making more money, and in the interest rate environment we're in, they're going to continue to make money."

Traders who favor range-bound strategies may find these three financial exchange-traded funds (ETFs) of particular interest. Let's take a closer look at each fund.

The ProShares Ultra Financials ETF, created in 2007, aims to provide twice the daily returns of the Dow Jones U.S. Financials Index. UYG's portfolio holds securities that reflect the performance of U.S. financial services companies as classified by Dow Jones. The fund has a year-to-date (YTD) return of -4.34% as of October 2018 and charges a 0.95% management fee. The ETF's price has traded in a broad trading range through 2018, with neither the bulls nor the bears able to take control. Those who wish to trade this consolidation period should look for an entry point close to the range's lower horizontal trendline at the $38.5 level. A stop-loss order should be placed just below the current swing low, while profit targets could be set either at the 200-day simple moving average (SMA) or near the top of the range between $45.5 and $46.

Launched in 2004, the Vanguard Financials ETF seeks to provide similar returns to the MSCI US Investable Market Financials 25/50 Index. The fund invests in financial stocks that make up the top 98% of the U.S. market by capitalization. VFH has a low expense ratio of just 0.1%, well below the 0.42% category average. YTD, the fund has returned -2.26% as of October 2018. The fund is trading within a roughly $6 range between $66 and $72, which offers good risk to reward opportunities for traders who utilize range-bound trading strategies. The $66 to $66.5 support level is a high-probability area to open a long position. A stop should be placed slightly below the October-low candlestick to minimize losses if the trade moves in the opposite direction. Traders could set take-profit orders back toward the top of the trading range at the $72 level, which is a likely resistance area.

Formed in October 2013, the Fidelity MSCI Financials ETF tracks the MSCI USA IMI Financials Index. The ETF holds stocks that cover the broad U.S. financial sector. As of October 2018, FNCL has a YTD return of -2.24% and razor-thin 0.08% expense ratio. FNCL's price is also trading within a range and initially bounced off the $38.5 support level but tested that price again in Thursday trading. Traders may wish to wait for a reversal candlestick pattern, such as a hammer or bullish engulfing candle, before entering a trade. A stop-loss order could sit below the Oct. 12 low. The trading range's upper horizontal trendline at $42 should provide resistance and is a suitable take-profit area.