What Is the KBW Bank Index?

What Is the KBW Bank Index?

Let me tell you about the KBW Bank Index—it's a benchmark stock index focused on the banking sector. This index was first developed by the investment bank Keefe, Bruyette, and Woods (KBW), which specializes in the financial sector. It weights 24 banking stocks that I've selected as indicators of this industry group.

These stocks represent large U.S. national money center banks, regional banks, and thrift institutions.

Key Takeaways

The KBW Bank Index tracks the stock prices of prominent banking companies, aiming to serve as a bellwether for those watching the banking industry. This index has been around since 1991. It includes 24 stocks chosen from the largest regional and nationwide banking companies.

Understanding the KBW Bank Index

You should know that the KBW index uses a float-adjusted modified-market capitalization-weighting method. The components are chosen by a committee of five people—four from KBW and one from Nasdaq—who meet quarterly. Their criteria aim to replicate specific market, industry, and geographic segments by selecting from the largest banking firms that meet initial eligibility.

The index specifically targets banking and downplays components that are heavily insurance-related or investment-oriented. For instance, you'll notice Goldman Sachs, Metlife, and Berkshire Hathaway are absent, even though they appear in other similar indexes.

History of the KBW Bank Index

The index started at the Philadelphia Stock Exchange, which Nasdaq later acquired. Because of its origins, some vendors still call it the PHLX/KBW Bank Index. It was set to an initial value of 250 on October 21, 1991, with options trading beginning on September 21, 1992. The index value is calculated and disseminated once per second during regular trading under the symbol BKX.

For many years, this was the standard benchmark for the banking sector in the stock market. It was also the main way to trade the broad sector through options before ETFs became common. Now, with more choices, it's not the only representative for banks.

You can find ETF versions, like the Invesco KBW Bank ETF under KBWB, which try to track the index by holding the same stocks. However, no ETF achieves perfect correlation due to needs like share redemptions.

According to Nasdaq, the Index Committee keeps turnover minimal. They evaluate composition quarterly in March, June, September, and December, with interim checks for events like stock splits, spin-offs, rights issuances, legal issues, or bankruptcies.

Large Banks vs. Regional Banks

Understand that while the KBW Bank Index represents the banking sector well, it focuses only on large-capitalization stocks. It doesn't include smaller regional banks. So, if you're analyzing the sector, look at both this index and something for the next tier. There's an ETF for the regional index, the Invesco KBW Regional Bank Index under KBWR.