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Bank ETFs Tumble on Archegos Downfall: What's in Store?

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The banking sector, which is among the biggest winners this year, had a rough ride to start the week. This is especially true as the KBW Nasdaq Bank stock index slid as much as 3.4% on the Mar 29 trading session, before paring losses to 2.3% at the close.

The decline came following the news that Archegos Capital, the family office run by Bill Hwang, was forced to liquidate, putting the banks in danger of losing billions of dollars. Archegos was unable to meet banks’ calls for more collateral to secure equity swap trades they had partly financed. After those positions fell sharply in value, lenders sold big blocks of securities to recoup what they were owed, according to Reuters. Per the source, global banks may lose more than $6 billion from the downfall of Archegos Capital, triggering a worldwide selloff in banking stocks.

Japan’s Nomura and Credit Suisse of Switzerland warned of major losses from lending to Archegos for equity derivatives trades. Nomura said it faced a possible $2 billion loss from transactions with a U.S. client, while Credit Suisse said a default on margin calls by a U.S.-based fund could be "highly significant and material" to its first-quarter results. Nomura shares closed down 16.3%, marking a record one-day drop, while Credit Suisse shares tumbled 14%, their biggest fall in a year (read: 4 Sector ETFs to Watch for Gains in Q2).

Other big banks like Morgan Stanley (MS) and Goldman Sachs Group (GS) shed 2.6% and 1.7%, respectively. Deutsche Bank (DB) dropped 5% while UBS Group (UBS) was off 3.8%.

ETF Impact

The awful trading in the stock world also pushed the bank ETF space into red on the day. In particular, Invesco KBW Regional Banking ETF (KBWR - Free Report) stole the show, declining 4.2%. This was followed by declines of 3.3% for SPDR S&P Regional Banking ETF (KRE - Free Report) , 3% for iShares U.S. Regional Banks ETF (IAT - Free Report) and 2.6% for SPDR S&P Bank ETF (KBE - Free Report) (see: all the Financial ETFs here).

Below we profile these ETFs in detail and discuss some of the specifics behind their recent slump:

KBWR

This fund follows the KBW Nasdaq Regional Banking Index, holding 51 stocks in its basket. It is a relatively less-popular and less-liquid option in the space, with AUM of $87.1 million and an average daily volume of 26,000 shares. It charges 35 bps in fees per year from investors.

KRE

This fund, having AUM of $4.7 billion and an average trading volume of around 8.6 million shares, offers exposure to regional banks. It follows the S&P Regional Banks Select Industry Index, charging investors 35 bps a year in fees. KRE holds 133 securities in its basket (read: 4 Reasons Why Bank ETFs Have More Room to Rally).

IAT

This ETF offers exposure to 54 small and mid-cap regional bank stocks by tracking the Dow Jones U.S. Select Regional Banks Index. The fund has amassed $633.3 million in its asset base and sees a good volume of 333,000 shares a day. It charges 42 bps in annual fees.

KBE

This fund offers equal-weight exposure to 96 banking stocks by tracking the S&P Banks Select Industry Index. Regional banks dominate the portfolio with 73.2% share while thrifts & mortgage finance takes 13.6%. The ETF has amassed $3.7 billion in its asset base while trading in heavy volume of 3.5 million shares a day, on average. It charges 35 bps in annual fees.

What Lies Ahead?

Despite the slide, the outlook for the banking industry looks promising. The industry and ETFs are clearly outpacing the broad market index and the fund from a year-to-date look. In fact, the KBW index is enjoying a strong rally this year, gaining about more than 21%

The strong trend is likely to continue given surging yields and an improving economy. As banks seek to borrow money at short-term rates and lend at long-term rates, a steepening yield curve will earn more on lending and pay less on deposits, thereby leading to a wider spread. This will expand net margins and increase banks’ profits.

Additionally, the rapid pace of vaccinations and government stimulus programs has fueled optimism for loan growth and lower-than-expected losses on bad loans. Further, the Biden administration’s focus on stimulating the economy and improving the nation's infrastructure will lend additional support to banks (read: Fed Bumps Up Economic Growth Forecasts: ETFs to Play).

Moreover, the three of the four products detailed above have a Zacks ETF Rank #2 (Buy), suggesting that these have the potential to outperform in the coming months. Almost all the industries falling under banking have a solid Zacks Rank in the top 33%.  

Given the solid outlook but somewhat bearish near-term sentiments, investors may want to consider staying on the sidelines for the time being. However, risk-tolerant, long-term investors may want to consider this recent slump a buying opportunity, should they have the patience for extreme volatility.

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