The fallout from the collapse of Silicon Valley Bank continues. After regulators shut SVB down on Friday, it was announced late Sunday that Signature Bank was being taken over to protect its depositors and the stability of the U.S. financial system.
This is after Signature customers scared by SVB’s collapse withdrew more than $10 billion in deposits. The sudden back-to-back failures of SVB and Signature represent the second- and third-largest bank failures in U.S. history.
The Fed also announced a new Bank Term Funding Program providing additional funding to help banks meet their depositors’ needs.
While President Joseph R. Biden said on Monday that “the banking system is safe,” investors are not so sure what to make of these developments. Bank stocks like JPMorgan Chase, Citigroup, and First Republic Bank fell on Monday, with First Republic’s stock being hit particularly hard (dropping nearly 62%). Meanwhile, The Cboe Volatility index approached highly risky territory, reaching 25.62 Monday afternoon, a level not seen since November.
“There are a lot of moving parts, so that’s why you see volatility,” Keith Buchanan, senior portfolio manager at Globalt Investments, told CNBC. “There are a lot of different scenarios in which this can develop, but it all boils down to: How widespread is this risk of contagion?”
While the risk of contagion is currently unknown and remains to be seen, the sudden failures of these two banks show that volatility and uncertainty could spring up at any time, which is why it’s important that investors have the ability to pivot when trouble arises. That’s where active management can come into play.
While passive strategies lack the flexibility to adapt to changing market environments, active ETFs can offer the potential to outperform benchmarks and indexes. Plus, active managers with greater resources and greater scope benefit from economies of scale, which can often translate to better returns.
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