Many investors know that Warren Buffett says to be greedy when others are fearful. Well, there are a lot of fears in the banking sector right now, especially when it comes to regional banks. However, it can be difficult to follow this advice in real time if you’re worried about a stock like Silicon Valley Bank or Signature Bank going to zero. Here come ETFs like the SPDR S&P Regional Banking ETF (NYSEARCA:KRE) to be useful.
The allure of using an ETF in a storm
Investors can use ETFs like the SPDR Regional Bank ETF to gain exposure to a potential recovery in the regional banking sector. The upside is that because ETFs are diversified, investors don’t expose themselves to the single-stock risk of a stock like Silicon Valley Bank.
KRE is incredibly diversified with 143 holdings. In addition, it is Top 10 Holdings account for just 20.3% of assets, giving investors ample protection against the risk of a single bank going under. KRE’s top holding, East West Bancorp, accounts for a paltry 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 with the proprietary TipRanks smart score System. Top holding East West Bancorp, as well as other top holdings PNC Financial and WinTrust Financial all have Smart Scores that are in the Perfect 10 range. The Smart Score is TipRank’s proprietary quantitative stock ranking system that ranks stocks based on eight different market factors. The score is data-driven and requires no human intervention.
Additionally, it’s worth noting that Silicon Valley Bank was KRE’s top holding at the end of the most recent quarter, and some of the other banks hardest hit by the recent decline were also among the top 10 holdings, such as the First Republic Bank and Zions Ban Corporation. While SVB, which became a zero, certainly hurt KRE, the fact that it was only 1.9% of the fund shows the power of diversification, as this was a hit KRE has yet to recover from rather than a fatal one .
More regional banks are less likely to collapse than they were a week ago. For one, the Federal Reserve’s new Bank Term Funding Program should help these banks weather the storm. Second, Silicon Valley Bank was hardly a typical regional bank. It was heavily geared toward tech and biotech startups, so it’s a pretty unique situation.
Long-term, “risky” assets like tech startups suffer as interest rates rise. The other two banks that went under recently, Silvergate Capital and Signature Bank, were also outliers due to their involvement in the cryptocurrency industry.
The risk/reward ratio is starting to look attractive
While regional banks do have risks and challenges that the industry must address, valuations are starting to look attractive based on a number of metrics following the recent industry-wide sell-off.
For example, holdings like Zions Bancorporation, Key Corp, and EastWest Bancorp now trade at 5.5, 6.4, and 6.3 times earnings, respectively, well below the average price-to-earnings multiple of the S&P 500, which is currently over 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 itself has an attractive forward-to-earnings multiple of just 7.7 as of March 16.
Additionally, many of these holdings are trading at or even slightly below book value, meaning the stock is trading for less than the company would be worth if its assets were liquidated today, giving investors a sizable margin of safety. Similarly, KRE is trading at a slight discount to book, with a price-to-book ratio of just under 1.0x.
Looking at some of the dividend yields among KRE’s holdings also shows that there is serious value in this sector — Key Corp currently yields 6.9%, while Zions is yielding 5.4% and PNC is yielding 4.9% achieved. Thanks to these high-yielding stocks, the KRE ETF offers a solid base Dividend yield of 3.4%. Along with that solid dividend yield, KRE also boasts a reasonable expense ratio of 0.35%.
Analysts expect significant upside potential going forward
Wall Street analysts also see significant upside potential for KRE. While the consensus rating for the ETF is a hold (i.e., neutral), it is average KRE stock price target from $64.73 implies significant upside potential of 49% from today’s prices, which would be an attractive yield for investors.
TipRanks uses proprietary technology to create analyst forecasts and price targets for ETFs based on a combination of the individual performance of the underlying assets. Investors can use the Analyst Forecast tool to view the consensus target price and rating for an ETF, as well as the high and low target price.
TipRanks calculates a weighted average based on combining all ETF holdings. The average price prediction for an ETF is calculated by multiplying the target price of each individual holding by its weighting within the ETF and summing it up.
Be greedy and smart when others are fearful
KRE is down an ugly 21% year-to-date, and while that paints a slightly grim picture, the ETF has been a longer-term winner. For example, KRE was a big winner in 2021, returning 39.3% for the year, suggesting that investors can earn lucrative returns from this ETF, but that it’s likely one to trade instead of it to buy and hold forever.
In summary, the banking sector has unsettled investors, but it can pay to be greedy when others are fearful. But simply being greedy can often lead to costly mistakes — so investors in an anxious environment need to be both smart and greedy. Investing in run-down regional bank stocks seems like an interesting high-risk, high-reward opportunity right now, and investing in a highly diversified ETF like KRE rather than risking a single stock in this volatile sector looks like a smart way to do it.
Of course, caution is still warranted and investors would be best served by making KRE part of a balanced portfolio strategy, but this looks like a favorable risk-reward setup in my opinion.
Source : finance.yahoo.com