Opportunity in Big Bank ETFs

The banking crisis hasn’t been terrible for all banks. A run on certain banks has translated into a run into others. After all, the money has to be kept somewhere—and unlike during the global financial crisis of 15 years ago, when big banks were loaded up with toxic subprime-mortgage-related securities—this time they are in much better shape. 

This, along with the widespread view that certain globally systemically important banks are “too big to fail,” has made them natural destinations for the money exiting regional banks. 

In the days following the collapse of Silicon Valley Bank, Bloomberg reported that Bank of America picked up $15 billion of new deposits. Other banking giants like J.P. Morgan, Citigroup and Wells Fargo also collected a large number of new deposits at the expense of smaller regional banks. 

More deposits mean cheaper funding for the banks. It also means more customers to whom the banks can offer other services. That’s the good news. 

The bad news is that the regional banking crisis increases the risk of an economic downturn, which is obviously bad news for all banks, big and small. It might also lead to increased scrutiny and regulations for the industry as a whole, something that could weigh on banks’ profitability. 

It’s because of these concerns that the big banks have been dragged down this month. The four aforementioned big banks are down anywhere from 10% to 20% so far this month, though that’s still better than the 26% decline for the SPDR S&P Regional Banking ETF (KRE) in the same period. 

Opportunity 

Some investors might look at big banks’ growing deposits and lower stock prices and see an opportunity. 

Their fundamentals haven’t deteriorated to nearly the extent of regional banks (and in some ways, they’ve improved), yet their stocks have fallen in sympathy.

If that’s your thesis, then the Invesco KBW Bank ETF (KBWB) might look interesting. The $1.4 billion ETF provides broad exposure to the banking industry. Its portfolio includes both national banks and regional banks, but because it’s market cap weighted, the big banks dominate. 

J.P. Morgan, Citigroup, Bank of America and Wells Fargo make up a combined 36% of the portfolio. 

Another option for investors seeking exposure to the big banks is a broad financials ETF, like the Financial Select Sector SDPR Fund (XLF). 

The ETF has 21% of its portfolio allocated to J.P. Morgan, Bank of America and Wells Fargo. Incidentally, the fund’s top holding, Berkshire Hathaway, also owns Bank of America. It’s the second-largest holding of Warren Buffett’s company, with an 11% weighting. 

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