What is the 'KBW Bank Index'

The KBW Bank Index, developed by financial sector specialist investment bank Keefe, Bruyette and Woods, includes 24 banking stocks. The stocks represent large U.S. national money center banks, regional banks, and thrift institutions. The KBW Bank Index is a benchmark stock index for the banking sector.

BREAKING DOWN 'KBW Bank Index'

The KBW index utilizes a float-adjusted modified-market capitalization-weighting method. It was set to an initial index value of 250 on October 21, 1991. Options began trading on September 21, 1992. 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. 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 PowerShares 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, they cannot be perfect due to any ETFs needs to prepare for share redemptions.

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. For consistency, the KBW Regional Bank Index, with the symbol KRX, is one solution. There is an ETF based on it called the PowerShares KBW Regional Banking Portfolio with the symbol KBWR. However, the KBWR is not actively traded.

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