Many investors know that Warren Buffett is said to be greedy when others are afraid. Well, right now, there’s a lot of fear in the banking industry, especially when it comes to regional banks. However, it can be hard to follow this advice in real time when you’re worried about a stock going down to zero, like Silicon Valley Bank or Signature Bank. This is where ETFs like the SPDR S&P Regional Banking ETF (NYSEARCH: KRE) comes in handy.
The appeal of using an ETF in a storm
Investors can use ETFs like the SPDR Regional Bank ETF to gain exposure to a possible recovery in the regional banking sector. The benefit is that investors will not be exposed to the risk of a single stock of a stock like Silicon Valley Bank because ETFs are diversified.
KRE is incredibly diverse, with 143 holdings. Furthermore, its top 10 holdings account for just 20.3% of assets, giving investors plenty of protection against the risk of a single bank failing. KRE’s main stake, East West Bancorp, represents just 2.14% of assets. Below is a look at the top 10 KRE holdings using TipRanks’ holdings tool.
Many of these top holdings also look attractive using TipRanks’ proprietary Smart Score system. Major East West Bancorp holdings, as well as major holdings PNC Financial and WinTrust Financial all have Smart Scores that reach a ‘Perfect 10’. Smart Score is TipRank’s proprietary quantitative stock scoring system that evaluates stocks on eight different market factors. Scoring is based on data and involves no human intervention.
Also, it’s worth noting that at the end of last quarter, Silicon Valley Bank was KRE’s largest holding, and some of the other banks most affected by the recent drawdown were also top 10 holdings, such as First Republic Bank and Zions Bancorporation. . While the SVB becoming a zero certainly hurt the KRE, the fact that it was only 1.9% of the bottom shows the strength of the diversification, as this was a hit from which the KRE could still recover, not a fatal blow.
The likelihood of more regional bank failures appears more remote than it was a week ago. On the one hand, the Federal Reserve’s new Term Bank Financing Program should help these banks weather the storm. Second, Silicon Valley Bank was hardly a typical regional bank. It catered heavily to tech and biotech startups, so it’s quite a unique situation.
Long-term “risk” assets like tech startups are hurt by rising interest rates. The other two banks that recently failed, Silvergate Capital and Signature Bank, were also outliers due to their involvement in the cryptocurrency sector.
The risk/reward ratio is starting to look attractive
While there are indeed risks to regional banks and challenges the industry needs to address, valuations are starting to look attractive following the recent industry-wide sell-off based on a variety of metrics.
For example, holdings such as Zions Bancorporation, Key Corp and EastWest Bancorp now trade at 5.5, 6.4 and 6.3 times earnings, respectively, well below the S&P 500’s average price/earnings multiple, which is currently above of 20. Even the third largest holding company, PNC Financial, which is a regional banking company with a market cap of $50 billion, trades at just 9.3 times earnings. KRE itself has an attractive average price/earnings multiple of just 7.7 on March 16th.
Furthermore, many of these holdings are trading at or just below book value, meaning the stock is trading for less than the company would be worth if its assets were liquidated today, giving investors a considerable margin of safety. . Likewise, KRE trades at a small discount to book value, with a price-to-book ratio of just under 1.0x.
Looking at some of the dividend yields across KRE holdings also shows that there is some serious value in this sector – Key Corp currently yields 6.9%, while Zions yields 5.4% and PNC yields 4.9%. Thanks to these high-yielding stocks, the KRE ETF offers a solid 3.4% dividend yield. In addition to this solid dividend yield, KRE also boasts a reasonable expense ratio of 0.35%.
Analysts expect considerable upside potential ahead
Wall Street analysts also see considerable upside for the KRE. Although the ETF’s consensus rating is Hold (i.e., neutral), KRE’s average stock price target of $64.73 implies a significant 49% upside potential from current prices, which would be an attractive return. for investors.
TipRanks uses proprietary technology to compile analyst forecasts and target prices for ETFs based on a combination of the individual performances of the underlying assets. By using the Analyst Forecast tool, traders can see the consensus target price and rating of an ETF, as well as the highest and lowest target prices.
TipRanks calculates a weighted average based on the combination of all ETF assets. The average price forecast for an ETF is calculated by multiplying the target price of each individual holding by its weight within the ETF and adding them all together.
Be greedy and smart when others are scared
The KRE is down an ugly 21% year-to-date, and while that paints a somewhat bleak picture, the ETF has been a winner over time. For example, the KRE was a big winner in 2021, returning 39.3% for the year, indicating that investors can earn profitable returns with this ETF, but it’s probably one to trade rather than buy and hold forever.
In conclusion, the banking industry has been troubling investors, but it can pay to be greedy when others are scared. But just being greedy can lead to costly mistakes – that’s why investors need to be smart and greedy in an environment of fear. Investing in degraded regional bank stocks seems like an interesting, high-risk, high-reward opportunity at the moment, and investing in a highly diversified ETF like KRE, rather than taking the risk of a single stock in this volatile sector, seems like a smart strategy. way to do it.
Caution is still needed, of course, and investors would be better served by making KRE part of a well-balanced portfolio strategy, but this seems like a favorable risk/reward setup, in my opinion.