Many investors know that Warren Buffett Says to be greedy when others are fearful. Well, right now, there is a lot of fear in the banking sector, especially when it comes to regional banks. However, it can be hard to heed that advice in real time when you're worried about a stock like Silicon Valley Bank or Signature Bank going to zero. Here's where ETFs like the SPDR S&P Regional Banking ETF (Nyaserka: KRE) to be useful.
The appeal of using ETFs in hurricanes
Investors can use an ETF such as the SPDR Regional Bank ETF to gain exposure to a potential rebound in the regional banking sector. The advantage is that investors will not expose themselves to the single-stock risk of a stock such as Silicon Valley Bank because ETFs are diversified.
KRE is incredibly diversified with 143 holdings. Besides, its Top 10 Holdings make up just 20.3% of assets, giving investors considerable protection from the risk of a single bank failure. KRE's top holding, East West Bancorp, makes up only 2.14% of assets. Below is a look at KRE's top 10 holdings using TipRanks' holdings tool.
Many of these top holdings also look attractive, using TipRanks proprietary smart score System. Top holding East West Bancorp, as well as fellow top-holdings PNC Financial and WinTrust Financial, all have Smart Scores that are at a ‘perfect 10′. Smart Score is TipRanks' proprietary quantitative stock scoring system that evaluates stocks on eight different market factors. The score is data-driven and does not involve any human intervention.
Additionally, it's worth noting that at the end of last quarter, Silicon Valley bank was KRE's top holding, and some of the other banks that got caught the most in the recent drawdown were also top 10 holdings, like First Republic. Bank and Zions Bancorporation. While SVB being zero certainly hurt KRE, the fact that it was only 1.9% of the fund shows the strength of diversification, as it was a hit that KRE could still bounce back from rather than a fatal one.
The prospect of more regional bank failures seems far more remote than it did a week ago. For one thing, the Federal Reserve's new bank term funding program should help these banks weather the storm. Secondly, Silicon Valley Bank was hardly your typical regional bank. It's focused a lot on tech and biotech startups, so it's a pretty unique situation.
Long-term, “risk-on” assets like tech startups are hurt by rising interest rates. The other two banks that recently came under, Silvergate Capital and Signature Bank, were also outliers because of their involvement in the cryptocurrency industry.
The risk/reward ratio is starting to look attractive
While there are indeed risks in regional banks and challenges the industry needs to resolve, valuations are starting to look attractive after a recent sector-wide selloff based on a number 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, which are well below the average price-to-earnings multiples for the S&P 500, which currently is more than 20. Even the third-largest holding, PNC Financial, a regional banking company with a market cap of $50 billion, trades at just 9.3 times earnings. KRE has an attractive average price-to-earnings multiple of just 7.7 as of March 16.
In addition, many of these holdings are trading at or slightly below book value, meaning that the stock is trading for less than the company would give investors a considerable margin of safety if its assets were liquidated today. Get. Similarly, KRE trades at a slight discount to book value, with a price-to-book ratio of less than 1.0x.
A look at some of the dividend yields among KRE's holdings also shows that there is some serious value in this sector — Key Corp currently has a yield of 6.9%, while Zyons has a 5.4% yield, and PNC has a 4.9% yield . Thanks to These High-Yielding Stocks, the KRE ETF Makes a Solid Offering Dividend Yield 3.4%, In addition to this solid dividend yield, KRE also has a reasonable expense ratio of 0.35%.
Analysts expect significant upside potential ahead
Wall Street analysts also expect significant upside in KRE. While the consensus rating on the ETF is a Hold (i.e. neutral), Average KRE Stock Price Targets $64.73 implies a significant growth potential of 49% from today's prices, which would be an attractive return for investors.
TipRanks uses proprietary technology to compile analyst forecasts and price targets for ETFs based on a combination of the individual performance of the underlying assets. Using the analyst forecast tool, investors can view consensus price targets and ratings as well as highest and lowest price targets for the ETF.
TipRanks calculates a weighted average based on a combination of all ETF holdings. The average price forecast for an ETF is calculated by multiplying the price target of each individual holding within the ETF by its weighting and adding them all up.
Be greedy and clever when others are fearful
KRE is down an ugly 21% year-to-date, and while it paints a bit of a bleak picture, the ETF has been a winner over time. For example, KRE was a big winner in 2021, returning 39.3% for the year, indicating investors can earn attractive returns with this ETF, but it's about trading as opposed to buying and holding forever. .
Finally, the banking sector has spooked investors, but it can pay to be greedy when others are fearful. But just being greedy can often lead to costly mistakes — so investors need to be both smart and greedy in a scary environment. Investing in beaten-down regional bank stocks looks like an interesting, high-risk, high-reward opportunity right now, and investing in a highly diversified ETF like KRE looks like a smart move rather than taking single stock risk in this volatile sector. way to do it.
Caution should certainly be exercised, and investors would be best served by making KRE a part of a well-balanced portfolio strategy, but in my view it looks like a favorable risk/reward setup.