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U.S. bank stocks suffered the steepest decline in nearly three years following the double whammy of bad news that could spell trouble for the entire industry. The KBW Nasdaq Bank Index tumbled as much as 7.7%, its biggest one-day drop since June 2020.
The four biggest banks shed about $52 billion in market value on Mar 9. The terrible trading in the stock world also pushed the bank ETFs space into deep red on the day. In particular, iShares U.S. Regional Banks ETF (IAT - Free Report) and SPDR S&P Regional Banking ETF (KRE - Free Report) stole the show, tumbling 8.1% each. This was followed by declines of 7.6% for Invesco KBW Bank ETF (KBWB - Free Report) , 7.3% for SPDR S&P Bank ETF (KBE - Free Report) and 6.9% for First Trust Nasdaq Bank ETF (FTXO - Free Report) . Notably, KRE dropped to its lowest level since January 2021.
The implosions at Silicon Valley Bank and Silvergate Capital sent shock waves across the banking sector. SVB Financial Group, a firm that specializes in venture-capital financing, took steps to shore up its capital position, stoking concern that soaring interest rates are eroding balance sheets across the financial industry. Shares of SVB fell more than 60%.
SVB Financial announced that it would sell $2.25 billion of stock, including $500 million worth of shares to private equity firm General Atlantic, to shore up its balance sheet. The bank lowered its full-year guidance and said it lost $1.8 billion as it sold off more than $20 billion worth of U.S. Treasuries that it bought when interest rates were near record lows (read: Rate-Sensitive Sector ETFs to Go Short on As Fed Turns Hawkish).
The collapse of Silvergate Capital Corp., one of the crypto market’s top banks, accelerated the sell-off. The California bank said that it plans to shut down its operations and liquidate after the crypto industry’s meltdown sapped the company’s financial strength.
The dual news has raised concerns of higher deposit costs, weakening loan demand, potentially weakening credit cycle and weakness in commercial real estate markets. The sector has been witnessing downward pressure after KeyCorp warned about elevated deposit betas early this month.
Below, we profile these ETFs in detail and discuss some of the specifics behind their recent slump:
IAT
iShares U.S. Regional Banks ETF offers exposure to 37 small and mid-cap regional bank stocks by tracking the Dow Jones U.S. Select Regional Banks Index. It is largely concentrated on the top three firms with a double-digit allocation each.
iShares U.S. Regional Banks ETF has amassed $671.6 million in its asset base while seeing a good volume of 99,000 shares a day. The product charges 39 bps in annual fees and has a Zacks ETF Rank #4 (Sell) with a High risk outlook.
KRE
SPDR S&P Regional Banking ETF provides exposure to the regional banks segment by tracking the S&P Regional Banks Select Industry Index. It holds 143 stocks in its basket, with each accounting for no more than 2.3% of the assets (read: 5 Most Heavily Shorted ETFs So Far This Year).
SPDR S&P Regional Banking ETF has AUM of $2.3 billion and charges 35 bps in annual fees. It trades in an average daily volume of 6.8 million shares and has a Zacks ETF Rank #4 with a High risk outlook.
KBWB
Invesco KBW Bank ETF provides exposure to the 25 leading national money centers and regional banks or thrifts. It follows the KBW Nasdaq Bank Index. Invesco KBW Bank ETF is concentrated on the top five firms that make up more than 8.8% share each.
Invesco KBW Bank ETF has managed $2.2 billion in its asset base and trades in a solid volume of 879,000 shares per day on average. The expense ratio comes in at 0.35%. KBWB has a Zacks ETF Rank #3 with a High risk outlook.
KBE
SPDR S&P Bank ETF offers equal-weight exposure to 97 banking stocks by tracking the S&P Banks Select Industry Index. Regional banks dominate the portfolio with a 72.9% share, while thrifts & mortgage finance, diversified banks, other diversified financial services and asset management & custody banks take the remainder.
SPDR S&P Bank ETF has amassed $1.6 billion in its asset base while trading in a heavy volume of 1.5 million shares a day, on average. The product charges 35 bps in annual fees and has a Zacks ETF Rank #3.
FTXO
First Trust Nasdaq Bank ETF follows the Nasdaq US Smart Banks Index, which measures the performance of U.S. companies within the banking industry. It holds 30 securities in its basket and charges 60 bps in annual fees.
First Trust Nasdaq Bank ETF has AUM of $212.7 million and trades in a volume of 59,000 per share on average. The product has a Zacks ETF Rank #2 (Buy).
What Lies Ahead?
With the latest decline, the bank index, which had a strong start this year, lost 10.6% over the past five days, wiping out all the gains. As a result, the KBW Nasdaq Bank Index turned into deep red from a year-to-date look.
Given 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.
This is especially true as banks are in the most advantageous position in a rising rate scenario as they seek to borrow money at short-term rates and lend at long-term rates. If interest rates rise, banks would earn more on lending and pay less on deposits. This would expand net margins and bolster banks’ profits (read: 4 Top Sector ETFs to Gain as Fed Signals Faster Rate Hikes).
When the Fed increases interest rates, pressure on margins will gradually alleviate and support banks’ net interest income. Notably, banks earn a major portion of their revenues from interest income. Additionally, the growing economy backed by strong hiring, rising consumer confidence, and increasing wages will continue to support the banking industry.
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Bank ETFs Tumble on Silicon Valley Bank Carnage
U.S. bank stocks suffered the steepest decline in nearly three years following the double whammy of bad news that could spell trouble for the entire industry. The KBW Nasdaq Bank Index tumbled as much as 7.7%, its biggest one-day drop since June 2020.
The four biggest banks shed about $52 billion in market value on Mar 9. The terrible trading in the stock world also pushed the bank ETFs space into deep red on the day. In particular, iShares U.S. Regional Banks ETF (IAT - Free Report) and SPDR S&P Regional Banking ETF (KRE - Free Report) stole the show, tumbling 8.1% each. This was followed by declines of 7.6% for Invesco KBW Bank ETF (KBWB - Free Report) , 7.3% for SPDR S&P Bank ETF (KBE - Free Report) and 6.9% for First Trust Nasdaq Bank ETF (FTXO - Free Report) . Notably, KRE dropped to its lowest level since January 2021.
The implosions at Silicon Valley Bank and Silvergate Capital sent shock waves across the banking sector. SVB Financial Group, a firm that specializes in venture-capital financing, took steps to shore up its capital position, stoking concern that soaring interest rates are eroding balance sheets across the financial industry. Shares of SVB fell more than 60%.
SVB Financial announced that it would sell $2.25 billion of stock, including $500 million worth of shares to private equity firm General Atlantic, to shore up its balance sheet. The bank lowered its full-year guidance and said it lost $1.8 billion as it sold off more than $20 billion worth of U.S. Treasuries that it bought when interest rates were near record lows (read: Rate-Sensitive Sector ETFs to Go Short on As Fed Turns Hawkish).
The collapse of Silvergate Capital Corp., one of the crypto market’s top banks, accelerated the sell-off. The California bank said that it plans to shut down its operations and liquidate after the crypto industry’s meltdown sapped the company’s financial strength.
The dual news has raised concerns of higher deposit costs, weakening loan demand, potentially weakening credit cycle and weakness in commercial real estate markets. The sector has been witnessing downward pressure after KeyCorp warned about elevated deposit betas early this month.
Below, we profile these ETFs in detail and discuss some of the specifics behind their recent slump:
IAT
iShares U.S. Regional Banks ETF offers exposure to 37 small and mid-cap regional bank stocks by tracking the Dow Jones U.S. Select Regional Banks Index. It is largely concentrated on the top three firms with a double-digit allocation each.
iShares U.S. Regional Banks ETF has amassed $671.6 million in its asset base while seeing a good volume of 99,000 shares a day. The product charges 39 bps in annual fees and has a Zacks ETF Rank #4 (Sell) with a High risk outlook.
KRE
SPDR S&P Regional Banking ETF provides exposure to the regional banks segment by tracking the S&P Regional Banks Select Industry Index. It holds 143 stocks in its basket, with each accounting for no more than 2.3% of the assets (read: 5 Most Heavily Shorted ETFs So Far This Year).
SPDR S&P Regional Banking ETF has AUM of $2.3 billion and charges 35 bps in annual fees. It trades in an average daily volume of 6.8 million shares and has a Zacks ETF Rank #4 with a High risk outlook.
KBWB
Invesco KBW Bank ETF provides exposure to the 25 leading national money centers and regional banks or thrifts. It follows the KBW Nasdaq Bank Index. Invesco KBW Bank ETF is concentrated on the top five firms that make up more than 8.8% share each.
Invesco KBW Bank ETF has managed $2.2 billion in its asset base and trades in a solid volume of 879,000 shares per day on average. The expense ratio comes in at 0.35%. KBWB has a Zacks ETF Rank #3 with a High risk outlook.
KBE
SPDR S&P Bank ETF offers equal-weight exposure to 97 banking stocks by tracking the S&P Banks Select Industry Index. Regional banks dominate the portfolio with a 72.9% share, while thrifts & mortgage finance, diversified banks, other diversified financial services and asset management & custody banks take the remainder.
SPDR S&P Bank ETF has amassed $1.6 billion in its asset base while trading in a heavy volume of 1.5 million shares a day, on average. The product charges 35 bps in annual fees and has a Zacks ETF Rank #3.
FTXO
First Trust Nasdaq Bank ETF follows the Nasdaq US Smart Banks Index, which measures the performance of U.S. companies within the banking industry. It holds 30 securities in its basket and charges 60 bps in annual fees.
First Trust Nasdaq Bank ETF has AUM of $212.7 million and trades in a volume of 59,000 per share on average. The product has a Zacks ETF Rank #2 (Buy).
What Lies Ahead?
With the latest decline, the bank index, which had a strong start this year, lost 10.6% over the past five days, wiping out all the gains. As a result, the KBW Nasdaq Bank Index turned into deep red from a year-to-date look.
Given 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.
This is especially true as banks are in the most advantageous position in a rising rate scenario as they seek to borrow money at short-term rates and lend at long-term rates. If interest rates rise, banks would earn more on lending and pay less on deposits. This would expand net margins and bolster banks’ profits (read: 4 Top Sector ETFs to Gain as Fed Signals Faster Rate Hikes).
When the Fed increases interest rates, pressure on margins will gradually alleviate and support banks’ net interest income. Notably, banks earn a major portion of their revenues from interest income. Additionally, the growing economy backed by strong hiring, rising consumer confidence, and increasing wages will continue to support the banking industry.