KRE Falls Behind XLF, Sparks SVB Collapse Flashbacks: Are ETFs Sensing Bank Trouble?

The bond market might be whispering, but ETF investors are already screaming back with a megaphone.

While Treasury yields rise again in 2025, one theme is becoming impossible to escape: the increasing underperformance of the SPDR S&P Regional Banking ETF KRE against the Financial Select Sector SPDR Fund XLF. So far into the year, KRE fund has declined more than 3% while XLF is up more than 5%.

The divergence between the two ETFs is getting larger, and it isn’t a rotational quirk. Rather, it’s a flashlight signaling the market’s new fear of regional bank exposure to interest-rate risk and bond portfolio depreciation.

For ETF observers, the XLF-KRE divergence might just be the warning system Wall Street wished it had on hand in early 2023.

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2023: ETFs As Bond Mine Canaries

The 2023 bank crisis provided a textbook example of duration risk failure. Several regional banks, most prominently Silicon Valley Bank, were dealt crippling losses as bond yields soared. With large positions in long-duration bonds and inadequate hedging, those losses quickly went from “unrealized” to “unmanageable.”

Investors watching KRE got the message fast. The ETF began to dip days before SVB's name started trending on social media. Meanwhile, XLF held its ground, encouraged by the resilience of large, diversified banks like JPMorgan JPM and Bank of America BACRP.

Now, in 2025, we're seeing a familiar pattern, and ETF investors are once again voting with their dollars.

The Divergence, Quantified

KRE: Trades at par with pre-SVB levels now, but it took more than a year of the collapse for KRE to regain the pre-SVB level.

XLF: has largely rebounded and even moved higher within months of the collapse, showing confidence in large banks.

This divergence is not merely cosmetic. It’s exposing a structural disconnect in the banking sector that ETFs are highlighting: confidence in big banks, doubt in small ones.

What KRE Is Saying

Investors in ETFs are evidently preparing for further pain, or at least further volatility, among regional banks. Here’s why:

Rate Risk Continues to Loom: In spite of regulatory pressure to better manage risk, much of the regional banking sector is still exposed to long-duration securities susceptible to price drops with increasing yields.

CRE Exposure: The underlying holdings of KRE feature institutions that are significantly weighted toward commercial real estate lending.

Liquidity Pressure: Even post-2023’s flight of deposits, smaller banks have few levers to lure and retain capital relative to their giant-bank counterparts.

In short: KRE is the portion of the financial sector that still feels vulnerable. And investors appear to be treating it thus.

Meanwhile, XLF Is Rolling

On the opposite side of the banking ETF fence, XLF has gained from its makeup. Such stalwarts as JPMorgan, Goldman Sachs GS, and Wells Fargo WFC did not just shelter from the worst of the 2023 chaos, they benefited from it. For instance Wells Fargo is up more than 100% from the lowest point hit in March 2023 after the SVB collapse. As deposits exited regional banks, they sought safer haven in these institutions.

XLF is now the “flight-to-safety” trade in the financials space, a safer-ish wager on institutions with diversified revenue bases, improved risk management, and better regulatory oversight.

The ETF Takeaway

This isn’t just sector rotation. The KRE-XLF divergence is a living snapshot of the way ETF investors are factoring in systemic risk. It’s also a cautionary note: when yields increase rapidly, even solid-looking portfolios can plunge.

For tactical ETF traders, the spread may be a trade opportunity, through long/short or volatility trades. For long-term investors, it’s a barometer for sector risk.

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