The Worst ETF to Own Right Now

XLF is now trading south of its formerly supportive 50-day moving average

May 30, 2017 at 2:56 PM
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Signs are suggesting the stock market is entering a period of low volatility -- an ideal scenario for options buyers. While call buyers may want to drill down on this list of the 25 best stocks for June, put buyers may want to take a closer look at financial shares. Specifically, the Financial Select Sector SPDR Fund (XLF) is one of the worst-performing exchange-traded funds (ETFs) in the month of June, according to data from Schaeffer's Senior Quantitative Analyst Rocky White. The average June XLF loss over the past 10 years is 3.4%, with the ETF positive just 20% of the time.

worst etfs to buy in june

XLF Has Struggled as the Trump Trade Loses Steam

XLF shares surged more than 46% from their June 27 post-Brexit low of $17.31 to their March 2 nine-year high of $25.30 -- a milestone that was inspired by a big rally in financial stocks on hopes the Trump administration would deregulate and cut taxes on the industry. However, the so-called Trump trade has lost steam in recent months.

And though XLF has repeatedly found a floor in the $23.00-$23.50 region -- home to its year-to-date breakeven mark and a 23.6% Fibonacci retracement of its recent rally -- the formerly supportive 50-day moving average appears to have switched roles to act as resistance. Today, XLF is trading down 0.7% at $23.44, as bank stocks struggle on Europe woes.

XLF Put Options Have Been Popular

XLF options traders have been growing increasingly skeptical in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the ETF's 10-day put/call volume ratio has jumped to 1.30 from 0.60 in the past two weeks. The current ratio ranks higher than 61% of all comparable readings taken in the past year, pointing to a slightly heavier-than-usual bearish bias among speculative players.

Echoing this put-heavy backdrop is XLF's front-month gamma-weighted Schaeffer's put/call open interest ratio of 2.39, which indicates near-the-money put open interest more than doubles call open interest among standard June options. The June 22 put is XLF's top open interest position, with 442,120 contracts outstanding.

XLF Short Sellers Have Been Jumping Ship

While this put-heavy strike has the potential to act as a magnet for XLF in the near term, short sellers have been abandoning their bearish positions of late -- meaning there's little in the way of sideline cash available to help fuel potential rallies. Short interest on XLF plunged nearly 16% in the two most recent reporting periods to 78 million shares, or 1.3 times the fund's average daily pace of trading.

XLF Options are Affordably Priced

Those wanting to bet on XLF's near-term trajectory -- one that includes an upcoming Fed meeting -- should strike while the iron's hot. The ETF's Schaeffer's Volatility Index (SVI) of 22% ranks lower than 88% of all comparable readings taken in the past year, meaning low volatility expectations are being priced into XLF's short-term options, a potential boon to premium buyers.

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