SVB’s Collapse Hit Banking ETFs

Exchange-traded funds covering banking stocks were hit hard on Friday, as Silicon Valley Bank was shut down in the biggest collapse since the 2008 crisis. 

On Wednesday, the company announced that it would raise more than $2 billion through securities offers and a deal with General Atlantic as a way of addressing steep losses of $1.8 billion around securities sales and deposit outflows from its customer base as startups have struggled. It has been the only publicly traded bank to specifically serve startups and Silicon Valley businesses.  

Following this statement, venture capitalist firms started pulling assets, with Bloomberg reporting that Peter Thiel told his Founders Fund’s portfolio companies that there was “no downside” to doing so. The bank’s stock fell about 60% before trading was halted Friday morning. The disaster culminated with the bank’s closure after its fundraising attempts failed and it was put into Federal Deposit Insurance Corp. receivership.  

The SVB unraveling comes on the heels of Silvergate, the most prominent bank serving the cryptocurrency industry, announcing its closure after clients departed in the wake of increased regulation and the FTX scandal. FTX was a major customer. Between SVB and Silvergate, the banking industry has been hit hard in the past week. 

"The SVB Financial situation has resulted in a broader ripple effect on the banking and financial stocks. The S&P Regional Bank Index is coming off its worst day yesterday since June 2020, and today we are seeing it carry on with further downside price action within the S&P Regional Bank Index along with the broader based Financial Select Sector Index," said Ed Egilinsky, a managing director at Direxion. He notes that the issuer's leveraged and inverse ETFs covering the regional banking industry and the broader financial industry have seen an exponential increase in trading volume during the past few days.

“It might not be an isolated event, but I don’t think this is the next catalyst for a financial and banking crisis,” Kevin Simpson, CIO of Capital Wealth Planning, told CNBC.

In midday trading, the actively managed BlackRock Future Financial & Technology ETF (BPAY), which only has about $4.3 million in assets, was down about 5%. BPAY has the most exposure to SIVB, with a weighting of approximately 4% in the security. At the same time, the $671.6 million iShares U.S. Regional Banks ETF (IAT) was down 5.6%, though its exposure is just about 3.2%.  

The $2.34 billion SPDR S&P Regional Banking ETF (KRE) has SIVB as its largest holding, at 2.3%, and that fund was down 5.7% in midday trading. Short sellers’ bearish interest in the KRE peaked in the lead-up to SVB’s collapse, Bloomberg reported, citing S3 Partners analytics firm’s data. 

Leveraged ETFs tracking the industry were also hit hard. The $140.4 million Direxion Daily Regional Banks Bull 3X Shares (DPST) is down almost 17%, which makes sense given that it magnifies its underlying index’s returns by a multiple of 3.  

In terms of the broader financials sector, the $32.7 billion Financials Select Sector SPDR Fund (XLF) was down 1.5%, as was the iShares Global Financials ETF (IXG). 

The Direxion Daily Financial Bull 3X Shares (FAS) was down 3.3%, while its counterpart the Direxion Daily Financial Bear 3X Shares (FAZ) was up 3.2%. 

Contact Heather Bell at [email protected]