KBW Bank Index: Meaning, Overview, History

What Is the KBW Bank Index?

The KBW Bank Index is a benchmark stock index of the banking sector. The index was first developed by the investment bank Keefe, Bruyette, and Woods (KBW), which specializes in the financial sector. It includes a weighting of 24 banking stocks selected as indicators of this industry group.

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

Understanding the KBW Bank Index

The KBW index utilizes a float-adjusted modified-market capitalization-weighting method. The index components are chosen by a committee of five persons (4 KBW employees and one full-time employee of the Nasdaq exchange) that meet quarterly. Their selection criteria seek to replicate certain market, industry, and geographic segments, by selecting from among the largest banking firms that meet the initial eligibility criteria.

The index focuses specifically on banking and de-emphasizes components that would be heavily insurance-related or investment-oriented. For example, Goldman Sachs, Metlife, and Berkshire Hathaway are notably absent from its components, though these stocks are listed in the holdings of other similar indexes.

Index Components

As of May 2021, the individual index components included:

• Bank of NY Mellon (BK)
• Bank of America (BAC)
• Capital One Financial (COF)
• Citigroup (C)
• Citizens Financial Group (CFG)
• Comerica (CMA)
• Fifth Third Bank (FITB)
• First Horizon (FHN)
• First Republic Bank (FRC)
• Huntington Bancshares (HBAN)
• JP Morgan Chase (JPM)
• Keycorp (KEY)
• M&T Bank (MTB)
• Northern Trust (NTRS)
• PNC Financial Services (PNC)
• People's United Financial (PBCT)
• Regions Financial (RF)
• Signature Bank (SBNY)
• State Street (STT)
• SVB Financial Group (SIVB)
• Truist Financial Corp (TFC)
• US Bancorp (USB)
• Wells Fargo & Co (WFC)
• Zion's Bancorp (ZION)

History of the KBW Bank Index

The index began its life at the Philadelphia Stock Exchange, which was later purchased by Nasdaq. Since the index originated as part of the Philadelphia Stock Exchange, some vendors still refer to it as the PHLX/KBW Bank Index. The index was set to an initial index value of 250 on October 21, 1991. Options began trading on September 21, 1992. Calculation and dissemination of the index's value happen once per second throughout the regular trading day under the symbol BKX.

For many years, the KBW Bank Index was the standard benchmark index for the banking sector in the stock market. It was also the only way to trade the broad banking sector thanks to the options market before the advent and proliferation of exchange-traded funds (ETFs). With so many other choices available to represent the sector, the index is now no longer the only representative for banks.

There are now ETF versions of the index available, including the Invesco KBW Bank ETF with the trading symbol KBWB. These ETFs attempt to track the underlying index by owning the same mix of component stocks, however, no ETF can achieve perfect correlation because of the fund's need to accommodate any redemption of shares.

According to Nasdaq, the Index Committee attempts to keep turnover at a minimum. The Committee evaluates the composition of the index on a quarterly basis in March, June, September, and December. Interim evaluations may take place after extraordinary circumstances. These circumstances include stock splits and certain spin-offs and rights issuances, and significant legal issues or a company's bankruptcy.

Large Banks vs. Regional Banks

Investors should understand that while the KBW Bank Index is a good representation of the banking sector, it only focuses on large-capitalization stocks. It does not include regional banks, which are typically somewhat smaller. Therefore, investors should analyze both the KBW Bank Index and a representative of the next tier in the banking sector. There is an ETF that tracks the regional index, the Invesco KBW Regional Bank Index under the ticker KBWR.