(Bloomberg) – The Sudden collapse of the Silicon Valley Bank and the resulting system-wide fears infection has sparked a $54 billion corner of the exchange traded fund universe.
Bank ETFs have been the center of attention for the past week, a stretch that’s seen Three US banks fail with little warning. Trading volume and options activity has skyrocketed across the category, propelling typical niche vehicles into some of the most heavily traded ETFs.
This surge in volume underscores an often touted key feature of ETFs: their usefulness as trading vehicles. ETFs, which represent a basket of securities and tend to be very liquid, are often seen activity peak in turbulent times as they can be traded easily, allowing investors to quickly reallocate exposure.
“With regional banks selling off in recent days, regional bank ETFs have become a risk-transfer place for exposure to this space,” strategists at Citigroup Inc., including Scott Chronert, wrote in a report. “The largest regional bank ETF has seen a spike in options activity, both calls and puts, and has become a battleground for expressing long/short views and trading volatility in the space.”
The $2 billion SPDR S&P Regional Banking ETF (ticker KRE), the largest fund focused on regional lenders, has played a starring role. KRE’s trading volume hit a record $4.9 billion on Friday, followed by another $4.2 billion traded on Monday, ranking it among the top 10 most-traded ETFs of the day. This compares to an average trading volume of around US$486 million over the past five years.
While most concerns were centered on regional banks, broader bank tracking funds were also on the up. The $29 billion Financial Select Sector SPDR Fund (XLF), the industry’s largest ETF, changed hands in about $5.5 billion worth of stock on Friday — the most since January. Friday’s trading volume in the SPDR S&P Bank ETF (KBE) of $1.2 billion was about $666 million, the highest since 2008.
The volatility has also fueled the options market. Combined open put and call interest in KRE has risen to an all-time high, according to Bloomberg Intelligence, as investors look to both hedge and make directional bets on the future of regional banks.
“Banking sector ETFs this month more than doubled their previous record for single-day trading volume – twice,” Bloomberg Intelligence ETF analysts James Seyffart and Rebecca Sin wrote in a report. “KRE has an estimated $8 billion in open interest options exposure, almost four times its net worth, which adds to its appeal like a Swiss Army knife to traders and institutions.”
