ETFs To Play The Banking Situation

With the collapse of Silicon Valley Bank, everyone is looking at the banking industry. Some think it has more room to fall, while others believe now is the best buying opportunity we have seen in a decade.

At this time, I believe it is too hard to pick which direction banks or the market overall is heading.

My reason for saying that is that very few people fully understand the real risk to the banking system at this time.

A few weeks ago, Wall Street banking analysts gave banks good stock ratings. Janet Yellen, the head of the Treasury Department, recently said the banking industry was healthy. Even Jerome Powell, Chairman of the Federal Reserve, recently sat in front of congress and testified that the banking system was solid and well-capitalized.

Well, that certainly wasn't the case for SVB.

While I understand that when Janet Yellen or Fed Chairman Powell make these statements, they are speaking about the whole industry, not one-off banks, as we saw during the financial crisis in 07-08, it only takes a few small cracks in the system to open the flood gates.

And when the 15th largest bank in the U.S. fails, it's hard to ignore that crack, despite the argument that SVB is different from most other banks because they lend to riskier clients in the form of 'start-up' businesses.

The argument that SVB is and was different may make sense, but if that is true, how do you explain Credit Suisse needing a $50 billion loan from the Swiss National Bank?

Finally, for years we have been told that the banks, both here in the U.S. and worldwide, have parts on their balance sheets that are referred to as 'black boxes.' These are certain businesses or investments that we, outsiders, will never get to see. We will never know what those parts of the bank's business look like, and thus, how can we fully understand how healthy or sick a bank is until it's too late?

Maybe you understand the banks better than I do and still want to invest in them, whether long or short; let me give you some exchange-traded funds that you can buy to profit from a bank industry move in either direction.

(If you have an opinion on where the banks are heading, comment below and let me know your thoughts.)

First, let us look at the bullish ETFs in the banking industry, and then we will touch on bearish ones.

Starting with the largest banking-related ETF, the Financial Select Sector SPDR ETF (XLF) has almost $30 billion in assets. Then we have the Vanguard Financials ETF (VFH), which has around $8 billion in assets. After VFH, the remainder of the roughly 47 financial-banking-related ETFs has under $2 billion in assets.

This means XLF, and VFH are probably where most investors should stick with if they are bullish on the industry since they will have the most liquidity and are least likely to close down if it gets hit with a significant loss.

If you want banks strictly in your ETF, look at the SPDR S&P Bank ETF (KBE) and the Invesco KBW Bank ETF (KBWB) or the iShares U.S. Regional Banks ETF (IAT). Those two only invest in banks, as opposed to companies like Berkshire Hathaway or BlackRock which are both found in the top ten holdings of XLF and VFH.

However, both ETFs are financial company focuses, meaning they will own banks and other financial industry businesses.

Suppose you want some leverage with the bank ETFs. In that case, you can buy Direxion Daily Financial Bull 3X ETF (FAS), the ProShares Ultra Financials ETF (UYG), the MicrosSectors U.S. Big Banks Index 3X Leveraged ETN (BNKU), or the Direxion Daily Regional Banks Bull 3X Shares ETF (DPST).

Now if you are looking at the bearish side, I would start with the fact that your options are limited to four ETFs.

We have the ProShares Short Financials ETF (SEF) and the 1X short ETF. This would be the least leverage and, therefore, the least risk for investors who believe the banks/financial industry is heading lower.

The next is the ProShares UltraShort Financials ETF (SKF) which will give you 2X short exposure. Then we have the Direxion Daily Financial Bear 3X Shares ETF (FAZ), which will give you maximum exposure to the downside.

Finally, we have the MicroSectors U.S. Big Banks Index 3X Inverse Leveraged ETN (BNKD), the only way for an investor to short just banks.

However, this is also a 3X leveraged fund, meaning it will be risky and with any leveregd products, not something you will want to sit in the long term due to the contango factor.

Financial industry investors may have a rough road ahead since there is so much uncertainty about the overall health of the industry. But, you have a few options to invest in the sector using exchange-traded funds.

(Remember, leave your opinion below about which way you think the financial industry-banks are heading.)

Matt Thalman Contributor
Follow me on Twitter @mthalman5513

Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.