What to Buy in the Banking Bust

Harry asked on my question line (303-747-4428) if the recent banking crisis presented investment opportunities in bank stocks or ETFs.

Yes.

The best approach to an industry-specific incident like this is to own a sector ETF. Doing so gets around bankruptcy risk, while still taking advantage of temporarily depressed prices. You don’t want to own shares of Silicon Valley Bank, but the bank sector.

Here are some ETF candidates, with price change since the sector peak on February 7:

Bank ETF Price Change
2/7/23 to 2/21/23 (%)
– – – – – – – – – – – – – – –
-13.6 XLF Financial SPDR
-13.7 VFH Vanguard Financial
-24.7 KBE Bank SPDR
-28.9 KRE Regional Bank SPDR
-31.6 IAT iShares Regional Bank

Leveraged ETFs haven’t fared much differently, given their broader focus, but might come back stronger in the rebound:

Bank ETF Price Change
2/7/23 to 2/21/23 (%)
– – – – – – – – – – – – – – –
-22.3 UYG ProShares Fin 2x
-37.5 FAS Direxion Fin 3x

Another option is to buy a smaller-cap index with exposure to financial stocks.

In The Kelly Letter, I use the S&P SmallCap 600 and S&P MidCap 400. Financial stocks comprise 18% and 16% of each, respectively. Their associated stock funds that power my 3Sig and 6Sig plans are IJR and MVV. Here’s how they fared since February 7:

IJR and MVV Price Change
2/7/23 to 2/21/23 (%)
– – – – – – – – – – – – – – –
  -9.8 IJR SmallCap 600 1x
-17.7 MVV MidCap 400 2x

Because getting in at a bargain price is only half the battle, I recommend approaching this moment in the same manner I recommend always approaching the stock market: with a rules-based system that reacts to price change only—no guesswork.

For that, this bargain moment offers newcomers a fine entry to my 3Sig and 6Sig plans. For that matter, my triple-leveraged 9Sig plan still trades at a discount to where it stood before the decline of 2022. All three plans, along with Income Sig, appear every Sunday morning in The Kelly Letter.

For perspective on the relatively low danger of this banking incident, I offer the following, from last Sunday’s letter:

“The average amount of cash on hand across banking is 13%, well over the 7% and 5% that SVB and Signature maintained. The average percentage of assets in bonds is 24%, compared with 55% at SVB.

“This is one reason that the current banking incident poses little systemic risk. Another is that it does not involve widely distributed ‘toxic assets’ of the type we saw in the subprime mortgage crash.

“That crisis was much bigger because almost every financial institution in the subprime era owned collateralized debt obligations (CDOs). Bad mortgages were securitized into time bombs on every balance sheet. When the no-income, no-job applicants (NINJAs) stopped making payments, lit fuses extended to every corner of the global financial system.

“SVB, Signature, and the latest struggler, First Republic, pose no such systemic threat. They got themselves into trouble through localized mismanagement.”

That makes this a good chance to jump on a sector sale or—better yet—start a long-term, rules-based system that beats the market over time.

I hope this helps!