The Situation With Midsize Banks

But yeah, this is a situation and we have to push aside our scheduled agenda and lineup to cover this for this so people understand what this means as ETF investors when you have some companies kind of blow up. I like that you said situation because maybe not a crisis. Situation seems for real, let's consider it that. What are the ETFs of note that we should be talking about today? Yeah, we're going to explore them. So I know we have Katie from Bloomberg News and some people from my team

on the show today. We all have tried to cover this from different angles. And the situation that's not a crisis. This situations from the Jersey Shore anyway. That aside, we've been trying to cover this from all angles, both Bloomberg News and Bloomberg Intelligence. And if I to pick one ETF that's just in the crosshairs of this whole thing, it's KRI, which is the Regional banking ETF. It's interesting like every now and then, when there is a situation or a crisis, you do tend to find there's an

ETF or two that just hits the spot. For this crisis isn't in the middle of it. And this ETF broke all kinds of volume records. It went down dramatically, the short interest, the options activity. It became the focal point for all kinds of big and small investors who needed to quickly position to deal with this situation. And KRE was just fascinated to watch. There are many other angles to this, but I think we should sort of explore what the ripple effects are when you have a

company like this completely just disappear. I mean, it went to zero. And how does that work, How do ETFs adapt, how do people use them, how does it affect the returns? There's definitely ETF angles all over the place for this. Okay, So to walk us through this mail storm, we've got James Sabert with Bloomberg Intelligence as well as Athanasios Saraphagus and Katie G. Bloomberg News, this time on Trilliance the situation. James,

Katie Athanasius, Welcome back to Trilliance. You're glad to be back. Welcome back to the situation. Thanks for having me. We've all been talking about the situation for a while, and we're going to talk about it a little bit more now because what I haven't actually talked about with any of you is the what's happening in ETFs. So let's start with kar which we teased at the top. James,

what the hell has happened? Yeah, so Eric, Eric did a good job of teasing what happened, but essentially Kerry became the center of like everything in the financial universe. I mean, Kry itself had seventeen stocks and portfolio that traded down over twenty percent on Monday, March thirteenth in the morning. Tons of them were halted, About eleven names were halted. The options activity on this thing went through

the roof. Tons of people were buying calls and puts, selling calls and puts, what have you, and the volume broke all kinds of records. And Kry isn't the only regional banking e TF. We're going to get into some of them. There's a lot of bank ETF, there's a lot of financials ETFs, but there's like about six that I really looked at that we're regional banking or banking specific that even all of them saw massive increases in volume. There was even a leverage version, which we can dive

into a little bit too. But KRY was definitely at the center of this whole storm. Katie, When did you learn about KRI? I learned about KRI. I mean it's always it's one of those ETFs that I know of, But how many times in my normal working life do I need to like look at the regional bankst midside banks being like, yeah, out of nowhere, who are these players? Yeah, Like I'm much more familiar with XLF for example. And then I mean the big brother of KRI k b E,

which are just broad banking ETF. So I mean KAR sort of like what we've been talking about, Like it feels like when these situations happen, or when you have crisis moments, some sort of big moment of up people in the market, there's like one ETF that becomes the poster child that everyone is just constantly checking in for

whatever reason. It's KR even though I mean I know that I Shares, for example, has a regional banking ETF as well, but it feels like KRI is as we're trying to figure this out on the fly, how much anxiety there actually is. This is sort of the risk appetite monitor. Yeah. One thing to add to what Katie was saying was that one of the reasons think KAR became such the focal point is that all the stocks

are equal weighted. So SVB had a nice juicy waiting at two percent, and so it could be used as a surrogate not only for all the regional banks, but SVB itself, So a lot of institutions and hedge funds. I think we're using this to hedge themselves from this situation. And secondly, though on the flip side, the fact that it was only a two percent waiting, I think speaks

to why people like ETFs is that you're diversified. So SVB was down it looks like sixty three percent in that you know, in March basically, but the ETF was down twenty six percent, so you weren't down near I mean twenty six is really bad for this product, but still you are protected a bit from single stock risk. So I think those are two also points to you know, put put out there in terms of how stocks that

go crazy can impact ETFs. The one thing that we haven't really touched on is there were you said there was multiple banks that went down, there was also a Signature bank that went down. So one of the things I looked at is as the one that Katie mentioned, the I Shares Regional Banking ETF ticker IAT and KARE, they both had both of them had exposure to both Silicon Valley Bank and Signature Bank. So I actually had a higher rating at four point six percent for both

of them, and KRE had four point one percent. And both of those, I mean, they're their equities are worthless now, so they're both gone to zero. So if you look at the bonds, they're Signature Bank is trading at about nineteen cents on the dollar for the bonds, and then if you look at the Silicon Valley Bank, they're trading

near fifty cents in the dollar. But still that means that the equity is wiped out, so it's one hundred percent loss in March essentially, And yeah, you know, this actually reminded us of an episode Joel that we did about a year ago, and Athanasius and Rebecca brought this up in that it felt like Russia in that you have this whole, this exposure in and fun that's just gone, like basically it's worthless. Even though it's a completely different situation,

it's kind of the same, Athanasio. One thing that stuck out to me has been the volumes that have kind of hit this, Like obviously there were some noteworthy investors. The lackman comes to mind, saying like, hey, there's a fire sale happening here that had all of the shares had already tanked by that point. Was there a buying opportunity there? Yeah, I think people want it to step in. Maybe not on SVB specifically because it was halted, but I think they were using the ETF as a proxy.

But while KRE is the focal point now, I'll be honest, I didn't know a lot about SVB before this, Like did you know it's an SMP five hundred company? So I think you're gonna have a situation where it's going to start popping up in these ETFs that people didn't know. You're like, oh my god, it's in that ETF two. There's probably one hundred two hundred plus ETFs that hold

it just because it was so well spread out. So um, yeah, I think we're going to be surprised to see how far the reach is because it's going to be touching a lot of different ETFs. I mean to the point on sort of buying opportunities and what you do actually on et F i Q. On Monday, Eric and I spoke to Eduardo Ripetto, who's the CIO over at Avantis Investors. He manages the advantis US small cap value ETF. It has five and a half billion dollars. A lot of

that is in banks. That's their top industry waiting. It's an actively managed fund. So we talked to him on Monday, and my question to him was are you shifting around your allocations at all? Are you doubling down or you de risking or you riding this out? And the answer that I got was just riding it out. You know, if you're managing a portfolio right now, you want to be you know, somewhat committed to your view and that

was what he said. And you look at what happened the rest of the week, it seems like that was an okay call. This situation reminded me of a mini version of two thousand and eight. As I said earlier, and I'll never forget when when I was writing my first book on the ETFs and I talked to Rob are not PRF is a rafi ETF that's fundamentally weighted, and it's not. It's a smart BADTF. So it uses rules, and the rules saw that banks were cheap in early two thousand and nine, so this ETF rotated and had

fifty percent bank stocks. In two thousand and nine, no active managers would buy bank stocks. They were radioactive at that point. But that one trade produced alpha for that ETF for like ten years, and some like I think Ben Johnson from Morning Star, I think he's the one credited with this, called it the immaculate rebalance. So to Eduardo's point, you know, not only if, especially as a quant as he is, you know, rotating into some of these really rough situations is where you pick up your

return over the average. So it's just the question of is it done, And that's obviously the big question. But certainly I think opportunity is here, especially if the Fed and Biden have been pretty much vocal that they're not going to let any anything go wrong. We mentioned two banks here, I think we neglected to mention that third, which is silver Gate, which was actually first and had a lot of crypto exposure, too many as all SI.

Funny enough, right, so silver Gate Silicon Valley Bank, and then don't run a bank that starts with S or SI. But uh, that was the silver Gate was the smallest of this was that in the ETS James silver Gate was also an ETS but a little bit less. But that's that's still trading. So you can still trade the equity on silver Gate. Um, it's it's winding down, but you can still you can still trade the equity on silver Gate. Okay, I think if we have one one area that saw a black eye here, it has to

be esg Um. When you look at this, I looked at the holders of I'm shocked, as you're coming out of your mouth. I know I'm getting a reputation as ESG hater, but again I'm not anti Eesg. I'm anti nasty, surprised, and this is a great teachable moment. I looked at the holders of SVB, and the number one fund was a sustainable fund. And then I looked and fifty ESG ETFs and mutual funds hold this stock. So clearly this stock checked all the right boxes for ESG. The bigger

point isn't that ESG messed up. This stock really satisfied its metrics. The bigger point is ESG metrics and scoring high there doesn't necessarily mean the companies doing well on in their books or is profitable. Those are two entirely different things. So it's I think maybe a little bit of a wake up call if you are an ESG investor. Just know that there's a difference and that ESG might not catch this and it doesn't really look at some

of these metrics that that this company had. It was really more concerned with those again ESG metrics, and they man, this company was like highly highly rated on the SG front. I mean, we debated this. I see his point. I don't you know. I think it's a loose connection ESG to you know, the visions management of the But to Eric's point, esg's an active decision, right, So it's really a teachable moment in that you know it's going to

pop up in a lot of these ets. It's an active decision to besg or rate it based on these metrics. It's got climate tech exposure. This is great. Yeah, you know, so, like you said, it's a teachable moment. But to the point I was making before it was in the SMP, it's going to get shoved into a lot of them because I think that's a bigger teachable moment than just DSG eric but point ticking. That's why we say it. For like the second half of the conversation I said

it was it was less of an important point. But it's a story that Bloomberg News wrote. It's a story that I saw Investment News. Another thing that was brought up here was, you know, last week we had we talked about the inverse. Jim Kramer ETF Kramer said people should buy this at three hundred and forty dollars about

a month ago. I was waiting. I couldn't wait for us to talk about this because what when we did our our segment, our last segment, which was one of my favorites, I was like, oh my, this is like perfectly timed. But here's the thing though, was SBB SBB came out of his mouth at a moment that they could invest. No, it was too early. It was a month before the ETF launched, so it was too back in the rear view mirror. So unfortunately it missed that. Had it caught, that SGIM would have started life on

third base. I mean that this would have been a great moment. That said, even without that bet, SGIM is still out performing the S ANDP by about five percentage points in the first eight days of trading. It's off to a pretty good start. But yeah, that would have been an epic call. And that's why that ETF exists, is to try to catch a few of those grand slams that he's capable of. So that's another sort of minor ETF angle on this. I wish this was in it because I think it'd be such a great case

study because they would have them so little. They would have shorted it right, and then I'm assuming they would have shorted it and then the ETF was halted, so you'd have this situation where like they were right, they couldn't actually realize the position because it got halted to covers.

You have like this amazing case study that it may have worked out even better because it's like you get like the you know, the press off of it, but not yet exactly, and they would be sitting on this like massive gain in not being able to realize it. I think it'd just be like such an amazing case study. There's one more, very minor e ETF angle in the leveraged area, so Ethanasios pointed this out. There's two leverage triple leveraged regional bank ETFs. If you're looking for some excitement,

these things are jacked up. But one of them, the one that goes negative three x closed, and it's one of those cases. We see this a lot where an ETF is out for say five, six, seven years, and it just liquidates and then its moment arrives like two years later or six months later even And I gotta imagine directions kicking themselves because that would have been a

great ETF to play it. That said, the three x long version, which is dpst deposit is still up, and people the volume on that spiked and people were shorting it to recreate a negative three x position. So when you have a stock like this create waves and volatility, you attract the gambling trading crowd. Like crazy. It's like chum in the water. And so I'm not surprised the

leveraged world got like some love too. I am surprised that those ever existed though, like they do seem too specific, but I guess this is why they thought a moment like this could happen. Eric, I'm curious. I know how much your dad loves leverage gtfs. Were these ones that he reached at you about. No, No, he's he's really really just into bedding on college basketball and stuff. I don't think he's doing ets. It's a good times. Yeah. The one thing we didn't talk about is the tickers.

So I mean, I must I must say I love the pairing of tickers. Oftentimes you get these leverage ETFs and they have really good tickers. And the three X bowl one is DPST a play on the word deposit, and the three X inverse was w d RW, a play on withdrawal. So it was so they were very they were very good tickers. The other thing I'm saying is I don't think Direction wanted to close w DRWM. They it would. W DRW was part of that, Like there was like eighty leverage funds that had to close

during March twenty twenty because volatility thresholds were broken. There was issues with like Evil even being able to operate the ETFs, so like this was part of that whole scenario. But I'm sure they wished they had relaunched if they could have. Was part of the March twenty twenty wipe out of leveraged. That said, though, I would think the negative would have done better and not been a risk,

whereas I don't know. I don't they probably could have lowered this inverse one to negative two x and it would have satisfied. But I'm guessing there just wasn't enough interest at the time and they were just like this one, we're just going to close. Because a lot of them they either lowered the leverage from three x to two x or even one x in some cases, or or they just closed them. And it looks like they closed the withdrawal ETF because, like you said, it might have

been too niche. So they left the bullish one open for whatever reason. It had enough assets and interest, but they had to close this one. And Athanasios, one note you wrote which I thought is interesting, which is sort of a pivot from this, is that it wasn't just volume and carry volume and ETFs in general spiked on March tenth in a way that suggested a lot of fear out there. And you just talk about your note where you say that this what you think is happening

is bears or back in control of the market. Yeah, I mean, it's just that's where everyone goes towards the ETF first. But if you look at just ETFs as or percentage of total volume, we shout up to like forty percent, which is really really high. I mean that's what we saw again during March. So yeah, and for the you know, for the first time, you know, we started knowing this slash year. It was always been in

favor of the inverse ETFs. They've always sort of outpaced long and the lungs are actually starting to come back slowly, but this completely put it back into the favor of the short So this was probably the biggest freak out moment we saw on a probably since the Russia invasion of last year. So yeah, definitely just led to a lot of trading and all ETFs, not just the bank ones. So a freak out that became a situation, what is it going to be now? I mean just looking at

flows and trading, people are still a little nervous. They've been like that for a year. I don't think I've haven't seen really people jump in aggressively. But I think the bigger issue is why does all the bad stuff happen in March? Yes? Right, I was talking about this with someone yesterday. It seems like COVID this we're almost at the anniversary of the fed's liftoff hike. Is Mars and retrograde? It might be. I mean, yes, this is almost to IDEs of March episode. And on that note,

we will wrap. Katie Ethanasius James, thanks very much for running us in Trillions, Thanks for having us to be aware, Thanks for listening to Trillions until next time. You can find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcast, Spotify, and wherever else you like to listen. We hear from you. We're on Twitter, I'm at Joel Wepper Shows, He's at Eric Calcuna's. This episode of Trillions was produced by Magnus Hendrickson. Bye