It’s been a rather incredible ride in recent days for the SPDR S&P Regional Banking ETF (NYSEARCA:KRE). Yesterday’s intraday drop of approximately 7% in the KRE exchange-traded fund (ETF) isn’t supposed to happen. After all, this is a broadly-diversified ETF, holding regional banks spread across the country.
That said, as with other sector-specific ETFs, a broad investor shift can create such a move. Year to date, the KRE ETF has seen a drop of 32%. The magnitude of this decline is what has many investors worried, considering that the last time this ETF declined at this pace was the pandemic, and before that, the Great Recession.
That said, today’s 2% move higher in the KRE ETF suggests that perhaps some bullish momentum is being built in this fund. Let’s dive into what investors may want to watch with this sector ETF.
The KRE ETF Continues to See Wide Swings
Undoubtedly, this year has provided catalysts that have led to these wild gyrations in the regional banking space. Various bank failures, including Silvergate (NYSE:SI), Signature Bank (OTCMKTS:SBNY) and SVB Financial’s (OTCMKTS:SIVBQ) Silicon Valley Bank certainly haven’t provided investors with confidence. Most recently, First Republic (NYSE:FRC) has stoked concerns that this banking crisis may not be over.
For regional banks, which perform much of the commercial lending in the U.S., rapidly rising interest rates appear to be behind this move. Many banks didn’t manage their duration risk well. That is to say that some banks borrowed short term and lent long term. Thus, when interest rates rose, the value of their longer-dated debt declined. And because most of these banks’ portfolios aren’t marked to market on a frequent basis, it’s been difficult for investors to determine what a bank’s true book value is.
Additionally, these rising rates have meant that the interest rates bank pay on deposits have had to increase, in order for these banks to remain competitive with Treasurys. Many investors have chosen to simply move their deposits out of banks and into Treasury bills. This has led to a run on specific regional banks, which has been exacerbated by deposit flight to some of the largest banks in the U.S.
Without an explicit guarantee from the Treasury Department around bank deposits being fully insured, this situation may be prolonged. Thus, investors betting on this sector may be in for more risk than they bargained for, particularly if more banks show signs of failing.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
