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Should You Stay Away from Bank ETFs Following Buffett?
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Berkshire's CEO and veteran investor 92-year-old Warren Buffett recently provided insights into the current banking sector. Buffett divested from multiple banks after identifying concerning issues in their financial practices.
He said he dumped several banks lately due to their leaders taking "dumb" risks and using deceptive accounting, as quoted on a businessinsider.com article. The article went on to explain that in a recent CNBC interview, he discussed his concerns about the banking sector, which has faced turmoil with the collapse of Silicon Valley Bank and Signature Bank in March.
Buffett’s Concerns Regarding Banks
Buffett observed that some banks were inflating their profits by valuing assets at cost instead of market value, and by mismatching their assets and liabilities. For instance, these banks accepted customer deposits that were readily withdrawable and utilized them to purchase long-term government bonds and mortgage-backed securities. This exact practice led to the collapse of Silicon Valley Bank in March due to a surge of withdrawals.
Buffett highlighted that his company sold the last of piece shares of the scandal-hit Wall Street behemoth Wells Fargo (WFC - Free Report) in the first quarter of 2022 even after holding that company for about 25 years. Over the last three years, Berkshire Hathaway has exited positions in JPMorgan (JPM - Free Report) , Goldman Sachs (GS - Free Report) , M&T Bank, and PNC Financial, while also reducing stakes in BNY Mellon and US Bank.
However, the company has built new positions in Citigroup, Ally Financial, Jefferies, and NuBank, and increased its stake in Bank of America. Bank of America is now Berkshire's number-two holding after Apple. Despite Berkshire's buying, the overall value of its bank stocks has slumped by 49% over the last three years, from $75 billion to $39 billion.
Any Other Worries?
Per Wall Street Journal, Moody's Investors Service, a prominent credit rating agency, has recently downgraded the credit ratings of 11 regional banks in the United States. . The downgrades could lead to increased borrowing costs for these banks, making it more challenging for them to raise capital and maintain their profitability.
Plus, there is growing concerns over the banks' ability to withstand potential economic shocks due to their exposure to the struggling commercial real estate (CRE) market. The CRE market has been facing headwinds as the pandemic continues to impact businesses and the wider economy.
In particular, retail and office properties have experienced significant challenges, including reduced demand for space and an increase in delinquencies and defaults. This has led to concerns that the banks' loan portfolios could face considerable losses if the CRE market does not recover quickly enough.
Any Ray of Hope?
Having said all, we would like to highlight big banks came up with upbeat results. As many as five out of six big U.S. banks were able to beat overall, while one bank came in with mixed earnings (read: Time for Big Bank ETFs on Upbeat Earnings?).
Still, if you want to follow Warren Buffett, you can stay away from banking ETFs like SPDR S&P Bank ETF (KBE - Free Report) . Rather, one can explore inverse/leveraged ETFs like Direxion Daily Financial Bear 3X Shares (FAZ - Free Report) , ProShares UltraShort Financials (SKF) and ProShares Short Financials (SEF) .
Any Caveat of Inverse/Leveraged ETF Investing?
Investors should note that these inverse leveraged products are extremely volatile and suitable only for short-term traders. Additionally, the daily rebalancing — when combined with leverage — may make these products deviate significantly from the expected long-term performance figures.
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Should You Stay Away from Bank ETFs Following Buffett?
Berkshire's CEO and veteran investor 92-year-old Warren Buffett recently provided insights into the current banking sector. Buffett divested from multiple banks after identifying concerning issues in their financial practices.
He said he dumped several banks lately due to their leaders taking "dumb" risks and using deceptive accounting, as quoted on a businessinsider.com article. The article went on to explain that in a recent CNBC interview, he discussed his concerns about the banking sector, which has faced turmoil with the collapse of Silicon Valley Bank and Signature Bank in March.
Buffett’s Concerns Regarding Banks
Buffett observed that some banks were inflating their profits by valuing assets at cost instead of market value, and by mismatching their assets and liabilities. For instance, these banks accepted customer deposits that were readily withdrawable and utilized them to purchase long-term government bonds and mortgage-backed securities. This exact practice led to the collapse of Silicon Valley Bank in March due to a surge of withdrawals.
Buffett highlighted that his company sold the last of piece shares of the scandal-hit Wall Street behemoth Wells Fargo (WFC - Free Report) in the first quarter of 2022 even after holding that company for about 25 years. Over the last three years, Berkshire Hathaway has exited positions in JPMorgan (JPM - Free Report) , Goldman Sachs (GS - Free Report) , M&T Bank, and PNC Financial, while also reducing stakes in BNY Mellon and US Bank.
However, the company has built new positions in Citigroup, Ally Financial, Jefferies, and NuBank, and increased its stake in Bank of America. Bank of America is now Berkshire's number-two holding after Apple. Despite Berkshire's buying, the overall value of its bank stocks has slumped by 49% over the last three years, from $75 billion to $39 billion.
Any Other Worries?
Per Wall Street Journal, Moody's Investors Service, a prominent credit rating agency, has recently downgraded the credit ratings of 11 regional banks in the United States. . The downgrades could lead to increased borrowing costs for these banks, making it more challenging for them to raise capital and maintain their profitability.
Plus, there is growing concerns over the banks' ability to withstand potential economic shocks due to their exposure to the struggling commercial real estate (CRE) market. The CRE market has been facing headwinds as the pandemic continues to impact businesses and the wider economy.
In particular, retail and office properties have experienced significant challenges, including reduced demand for space and an increase in delinquencies and defaults. This has led to concerns that the banks' loan portfolios could face considerable losses if the CRE market does not recover quickly enough.
Any Ray of Hope?
Having said all, we would like to highlight big banks came up with upbeat results. As many as five out of six big U.S. banks were able to beat overall, while one bank came in with mixed earnings (read: Time for Big Bank ETFs on Upbeat Earnings?).
Still, if you want to follow Warren Buffett, you can stay away from banking ETFs like SPDR S&P Bank ETF (KBE - Free Report) . Rather, one can explore inverse/leveraged ETFs like Direxion Daily Financial Bear 3X Shares (FAZ - Free Report) , ProShares UltraShort Financials (SKF) and ProShares Short Financials (SEF) .
Any Caveat of Inverse/Leveraged ETF Investing?
Investors should note that these inverse leveraged products are extremely volatile and suitable only for short-term traders. Additionally, the daily rebalancing — when combined with leverage — may make these products deviate significantly from the expected long-term performance figures.