A number of exchange traded funds suffered sharp falls for a third day on Monday as the fallout from the collapse of US lenders Silicon Valley Bank and Signature Bank rippled out across equity markets.
One of the biggest losers was the iShares US Regional Banks ETF (IAT), which by late morning US trade had tumbled 27 per cent from its closing price on Wednesday, before the start of the sell-off.
The SPDR S&P Regional Banking ETF (KRE), Invesco KBW Bank ETF (KBWB), and iShares S&P US Banks UCITS ETF (BNKS) were also down by more than 20 per cent.
The losses were far worse for some niche leveraged ETFs, with the Direxion Daily Regional Banks Bull 3x Shares (DPST) falling by more than half over the same time period.
While most ETFs had limited direct exposure to the failed financial institutions, some did have outsized positions as of the close of trading on Wednesday.
BlackRock Future Financial & Technology (BPAY) was the ETF most exposed to Silicon Valley Bank with a holding of 4.3 per cent, according to data from VettaFi, a New York-based consultancy.
This was followed by the iShares US Regional Banks ETF at 3.2 per cent, the Invesco KBW Bank ETF with 2.9 per cent, the SPDR S&P Regional Banking ETF holding 2.4 per cent, and Invesco S&P 500 GARP ETF (SPGP) with 2.1 per cent.
The Grayscale Future of Finance ETF (GFOF) had the largest exposure to Signature Bank at 6.2 per cent, the VettaFi data shows.
The next largest exposures were at First Trust SkyBridge Crypto Industry and Digital Economy ETF (CRPT) at 3.8 per cent, BPAY with 3.7 per cent, the Capital Link Global Fintech Leaders ETF (KOIN) at 2.3 per cent, and Schwab Crypto Thematic ETF (STCE) with 1.9 per cent.
Todd Rosenbluth, head of research at VettaFi said these ETFs “provided security level diversification but not industry or thematic risk mitigation”, as the contagion spread.
“ETFs provide diversification benefits but when the industry is under pressure there are limited offsets,” he added.
Peter Sleep, senior portfolio manager at Seven Investment Management, questioned why a fund such as the BlackRock Future Financial & Technology ETF was investing in Silicon Valley Bank in the first place.
“What was futuristic about Silicon Valley Bank?” he asked. “It’s just a regular bank. I don’t have a lot of respect for the index creator behind the fund if they thought that a regular old-fashioned bank that took deposits and invested them in Treasuries was a futuristic bank.”
BlackRock declined to comment.
Sleep said “nichy”, higher-risk ETFs such as those focused on regional banks exposed investors to greater risks without compensating them with extra returns.
Citing data from Deutsche Bank and the Federal Deposit Insurance Corporation indicating there have been 563 bank failures in the US since 2001, Sleep added “lumping banks into indices in this way is quite a high-risk approach”.
Fund giants Vanguard, State Street Global Advisors and BlackRock were the three largest shareholders in Silicon Valley Bank, with a combined stake of 21.6 per cent as of December 31, according to Refinitiv data.
They accounted for three of the four largest investors in Signature Bank, with a combined 21.5 per cent stake.
Among broader sector funds, the Xtrackers MSCI USA Banks UCITS ETF (XUFB) was down 15 per cent from Wednesday’s close and the Vanguard Financials ETF (VFH) was 9 per cent lower. The latter had a combined exposure of 0.54 per cent to Silicon Valley Bank and Signature Bank as of January 31, when it last published portfolio data.
Rosenbluth at VettaFi said that while it was “too soon” to discern the full knock-on effects of the banking collapses and subsequent market sell-off, “investors are more likely to shift toward higher-quality equity investments where there is greater confidence in the cash flow and balance sheet strength of the companies inside an ETF, rather than companies with greater leverage and less certain prospects in industries like fintech and biotech”.