Regional Bank ETFs Bounce Back Even as Questions About the Sector Linger

While earlier this week regional banking exchange-traded funds’ declines reflected the slump in shares of regional banks including PacWest Bancorp, Western Alliance Bancorp and First Horizon Corporation, overall, investors were confident about the long-term outlook for the regional lenders. 

The SPDR S&P Regional Banking ETF (KRE) was up 5.4% on Friday, while the iShares U.S. Regional Banks ETF (IAT) and the Invesco KBW Regional Banking ETF (KBWR) gained 5.5% and 3.7%, respectively.  

First Republic Bank was taken over by regulators during the weekend and was auctioned off to JPMorgan Chase. FRB is the fourth regional bank to collapse over a two-month period. Silicon Valley Bank, Signature Bank and Silvergate Bank were all shuttered in March. 

The ongoing market volatility, which has seen regional bank shares plummet and the value of related ETFs oscillate this week, has not dissuaded investors. Industry analysts say the current market provides an opportunity to use ETFs as a tool to both profit and manage risk, which has been borne out in the way ETFs bounced back today. 

When we think about what is happening in the banking sector in the U.S., many people have found that ETFs can be a very useful tool if you don’t believe the current sentiment about a sector as an opportunity to go long on the entire sector,” Deborah Fuhr, founder of ETFGI, told etf.com. “Others can see that ETFs can be a tool that you can use to go short, and an opportunity to make money.” 

Joanne Hill, chief advisor of research at Cboe Vest, told etf.com that ETFs could be used to manage risk: “I think that sector and industry ETFs are very useful in combining with positions in the individual stocks to hedge some of the risks in that sector, whether you are long or short.” 

Regional banks have historically been the backbone of the U.S. banking industry and provide specialized services for local communities and business, which gives investors confidence in their long-term stability and importance to the overall financial system. 

"They are vital to the economy. Small and medium-size businesses depend on them for loans, business growth and keeping their deposits,” Hill noted. 

Crisis Far From Over 

After the Federal Reserve raised interest rates by 0.25% on Wednesday, banks are facing additional interest rate risks. If an interest rate rise has an impact on the value of a bank’s assets that it holds as reserves, declines in reserve values can leave less capital on hand for customers to withdraw.  

Hill believes market volatility will continue to increase, as banks are not raising the rates they pay on deposits in line with interest rates. 

“Now this sector is in focus, [customers] might be getting less patient with that and wanting to withdraw funds and put it in Treasury bills or other short-term fixed income products like short-term ETFs instead of keeping it at their bank," Hill added, speaking on the sidelines of etf.com’s Awards ceremony this week. “In my mind, that’s a more ongoing concern that might impact the regional banking sector. 

Others are already calling for more drastic changes to save regional banks. Bill Ackman, CEO of Pershing Square Capital Management, said “regional banks are at grave risk” in a Tweet early Thursday. 

“We are running out of time to fix this problem. How many more unnecessary bank failures do we need to watch before the FDIC, the U.S. Treasury and our government wake up?” he warned. “We need a system-wide deposit guarantee regime now.”