In March 2023, cracks in the U.S. banking sector began appearing in a manner reminiscent of the failure of Washington Mutual during the 2008 financial crisis. One after the other, several prominent regional banks collapsed under a deluge of panicked depositors seeking to withdraw their capital.
Starting with the failure of Silicon Valley Bank in March, contagion spread to other firms across the country, with New York City-based Signature Bank and eventually San Francisco-based First Republic Bank toppling over the ensuing weeks amid plummeting share prices.
In an attempt to limit contagion, U.S. banking regulators took extraordinary steps, such as guaranteeing all deposits, brokering acquisitions by larger, more stable firms, and backstopping liquidity. Still, the effects of the crisis were felt market-wide, with financial sector stocks being particularly hard-hit.
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Investors holding exchange-traded funds, or ETFs, with high financial sector exposure suffered higher-than-expected losses in the wake of the crisis. “The more concentrated or homogenous the holdings of an ETF, the more impact bad news hitting a particular industry or large industry player will have on it,” says Dan Tolomay, chief investment officer at Trust Company of the South.
That being said, some experts caution against adopting an overly bearish mindset when it comes to the long-term prospects of U.S. bank stocks.
“We suggest caution when drawing strong parallels to 2008, when credit risks such as bad housing loans, falling home prices and excessive leverage spawned the global financial crisis,” says John Gentry, senior vice president and head of corporate fixed income at Federated Hermes.
For risk-tolerant investors, the recent losses suffered by bank stocks could be a good opportunity to establish a low cost basis in a variety of different ETFs that hold high financial sector exposure.
Here’s a look at seven ETFs investors can use to bet on a banking sector rebound:
| ETF | Expense ratio | Assets under management |
| Financial Select Sector SPDR Fund (ticker: XLF) | 0.10% | $32 billion |
| Vanguard Financials Index Fund (VFH) | 0.10% | $7.9 billion |
| Invesco KBW Bank ETF (KBWB) | 0.35% | $1.3 billion |
| SPDR S&P Regional Banking ETF (KRE) | 0.35% | $3.1 billion |
| SPDR S&P Bank ETF (KBE) | 0.35% | $1.3 billion |
| iShares U.S. Regional Banks ETF (IAT) | 0.39% | $787 million |
| Roundhill Big Bank ETF (BIGB) | 0.29% | $4.5 million |
Financial Select Sector SPDR Fund (XLF)
“Big banks have the perceived safety of being deemed ‘too big to fail,’ while smaller banks are not viewed as key to the financial system and may not receive a lifeline in a serious crisis,” Tolomay says. “Thus, there is the risk that deposit flight from small to big banks could cause stress on the former.”
For investors looking to avoid excess exposure to small banks, the ETF to consider is XLF. This ETF tracks 72 market cap-weighted financial sector stocks represented in the broader S&P 500 index. Currently, the top bank holdings in this ETF include JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Wells Fargo & Co. (WFC) and Morgan Stanley (MS). As with all of SPDR’s “Select Sector” lineup of ETFs, XLF charges a 0.1% expense ratio.
Vanguard Financials Index Fund (VFH)
“The uncertainty around most banks’ profitability has increased due to the recent crisis, but they remain attractive from a valuation perspective,” says John Cunnison, vice president and chief investment officer at Baker Boyer Bank. “If we get even a little good news on the inflation front and even the suggestion that we are moving back to a normal yield curve, bank stocks could be an attractive investment.”
For exposure to more than 390 financial sector stocks that also includes a sizable allocation to bank stocks, investors can consider VFH. By tracking the MSCI US Investable Market Index (IMI) Financials 25/50, VFH provides market cap-weighted exposure to small-, mid- and large-cap financial stocks. Notable top holdings include JPMorgan Chase, Bank of America, Wells Fargo and Morgan Stanley.
Invesco KBW Bank ETF (KBWB)
“When it comes to bank ETFs, we have a preference toward a market cap-weighted ETF that tilts toward larger-cap bank stocks,” says Jon Maier, chief investment officer at Global X ETFs. “These big institutions remain healthy owing to high regulation, which is a consequence of 2008.” For an alternative to XLF and VFH that only tracks bank stocks, investors can buy KBWB.
This market cap-weighted ETF tracks the KBW Nasdaq Bank Index. Currently, Morgan Stanley sits at the top of the ETF’s holdings with a 7.97% weight, followed by Wells Fargo, JPMorgan Chase and Bank of America. “The largest banks are in extremely healthy financial shape due to stringent post-2008 regulation,” Cunnison says. KBWB charges a 0.35% expense ratio.
[SEE: 7 Best ETFs to Buy Now.]
SPDR S&P Regional Banking ETF (KRE)
“I think that most regional banks are actually lot healthier than current headlines might suggest, particularly after some of the most recent regulatory actions such the new Bank Term (Funding Program) loan facility,” Cunnison says. “The facility allows banks with qualifying collateral to borrow against the par value of the collateral, which provides a strong backstop.”
For pure exposure to regional bank stocks, the ETF to watch is KRE, which tracks the S&P Regional Banks Select Industry Index. This index utilizes a modified equal-weighted strategy, which means that the smaller regional banks are not dwarfed in terms of representation by their larger counterparts. KRE currently charges a 0.35% expense ratio.
SPDR S&P Bank ETF (KBE)
Investors looking for exposure to both large bank and regional bank stocks in roughly equal allocations can consider KBE, which tracks the S&P Banks Select Industry Index. This ETF uses a similar modified equal-weight methodology to KRE, which ensures a greater proportion of mid- and small-cap banking stocks. It also charges an identical 0.35% expense ratio.
The effects of this weighting strategy can be seen in the ETF’s industry representation, where 68% is dominated by regional banks. While big banks like Wells Fargo, JPMorgan Chase and Citigroup Inc. (C) are still present, they have a lower allocation compared to regional banks. This makes the ETF a possible holding for investors seeking the best of both worlds.
iShares U.S. Regional Banks ETF (IAT)
Another option for regional bank exposure is IAT, which tracks the Dow Jones U.S. Select Regional Banks Index. This index diverges from the modified equal-weight strategies used by KRE and KBW in favor of a more traditional market cap-weighted methodology. That is, larger regional bank stocks in IAT have a proportionally higher representation versus smaller ones.
Currently, IAT sports a portfolio of 35 holdings, with top constituents composed of PNC Financial Services Group Inc. (PNC), U.S. Bancorp (USB) and Truist Financial Corp. (TFC). Due to IAT’s market cap-weighted index, these three stocks account for about 38.5% of the ETF’s total assets. IAT currently charges a 0.39% expense ratio, which is more expensive than KRE.
Roundhill Big Bank ETF (BIGB)
“Although the crisis seems to have ebbed, we still see signs of additional weakness that may disproportionately affect regional banks relative to larger banks,” says Tim Maloney, co-founder and chief investment officer at Roundhill Investments. “This is why we believe concentrated vehicles to provide exposure only to the biggest companies in banking can be valuable to investors.”
BIGB debuted in late March 2023 at the height of the regional banking crisis, offering concentrated market cap-weighted exposure to a handful of big-bank stocks. Currently, the ETF holds JPMorgan Chase, Goldman Sachs Group Inc. (GS), Morgan Stanley, Wells Fargo, Bank of America and Citigroup for a 0.29% expense ratio. However, keep in mind that this ETF is fairly new and has only accrued $4.5 million in assets under management.
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7 ETFs to Bet on a Banking Sector Rebound originally appeared on usnews.com
Update 06/23/23: This story was previously published at an earlier date and has been updated with new information.
