As Banks Collapse, Start Looking Ahead

Almost two months ago, I wrote about how you could buy exchange-traded funds, both long or short, to play what, at the time, we were told was a one-off banking crisis with just Silicone Valley Bank.

The point at the time was that it was unlikely that Silicone Valley Bank was the only bank that took on outsized risks, and therefore it was unlikely they would be the only bank that would have problems.

Fast forward almost two months. We have had three banks, Silicone Valley included, fail in the U.S., and Credit Suisse needing a loan from the Swiss Nationals bank. We have also, more recently, had several bank stocks take massive noise dives as investors fear they are the next bank to fail. And we even had Pacific West Bank announce that they are looking at potential sale options and strategies to sure up the company.

We can all sit here and believe what Janet Yellen and Federal Reserve Chairman Powell tell us about the financial sector's health and go on with our day.

But, while the overall financial sector may very well be as healthy as they claim it is, a lot of banks, both big and small, are seeing their stock prices tank. And as an investor, when I see this type of price destruction, I immediately think, "Am I missing a good or even great investment opportunity while this plays out?"

As I said two months ago, I can't tell you if the banks will go higher or lower in the near future from where they sit today; I am not that intelligent.

But I know that the big banks, not the regional ones, will survive this crisis in the long run. And, based on history, i.e. the 2007-2008 financial crisis, the big banks are likely to get even more significant.

If anyone thought the big banks were "too big to fail in 2008," they are even more prominent today. Hence, they are indeed too big to fail today.

Furthermore, since the bank was failing, JPMorgan Chase just bought most of First Republic Bank's assets. That move has made JPMorgan even larger; big banks are getting even bigger.

All of this is why I have no concerns about buying big bank stocks, with the understanding that I will own them for a long time.

Remember, though, this strategy is a little risky in the short term since the big banks could get a decent haircut if the banking crisis spreads uncontrolled. This, is why I would advise buying these ETFs in small amounts over time. Some investors call it buying in thirds, which is fine, or you can buy your full position over even more trades, like six to ten.

The idea is that you are averaging into a position, so it if declines after you buy it, you are reducing your overall cost if you buy more as it continues to decline. This method helps investors avoid having FOMO and then having their account lose massive value if the investment does meaningfully decline quickly. It also takes care of actually missing a move higher because you are afraid the investment has further to fall, but it never actually does.

With that all said, let's look at a few ETFs you can start buying or have on your watchlist for when you are ready to jump into the banking sector.

The first is the financial ETF king, the Financial Select Sector SPDR ETF (XLF).

XLF has over $31 billion in assets and is hands down the largest player in the financial ETF world. XLF has over 75 holdings, which is also very nice since you know your money will be spread out during these troubling times. However, the fund's top-ten holdings do represent a little more than 50% of the assets.

Next, we have the Vanguard Financials ETF (VFH).

The VFH is much smaller, at only $7.7 billion in assets and fund, but it is much more diversified, with 375 holdings. That many holdings can be both good and bad since there are so many stocks in the fund; not one or two will hurt the fund. But the other side is that it's unlike one or two big winners will move the needle. The one good thing I can see with VFH is that it is a market-cap-weighted fund, meaning the big financial firms will hold more sway than the smaller regional banks.

Finally, I want to point out the Direxion Daily Financial Bull 3X ETF (FAS).

FAS is a three-times leveraged bullish ETF. FAS will give you the best return if you can get in just before the financial sector turns higher. However, since FAS is three times leveraged, if the financial sector continues to decline, you will lose three times as much as you would if you were in XLF or VFH. Invest carefully and timely if you decide to move forward with FAS.

The financial sector is in turmoil today, but that will eventually turn, and the industry will return to a bull market. It may take time but be prepared for when the tide turns.

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.