As Banks Rally on Tax Benefits, Short Sellers Sit This One Out

As banks excited investors over recent days with details of how the U.S. tax overhaul will boost profits, many short sellers were watching from the sidelines.

In the days after the tax bill was passed on Dec. 20, notional short interest as a percentage of assets for one of the biggest financial-focused exchange-traded funds fell by about half. The measure in the Financial Select Sector SPDR Fund, which trades on the ticker XLF, has been stable around 5 percent in the weeks since, according to financial analytics firm S3 Partners.

Over the past week, the six biggest U.S. banks estimated cuts in their effective tax rates that could boost annual profits by more than $10 billion. The lenders announced plans to return much of that windfall to shareholders, while boosting pay for employees and potentially increasing some lending.

The banks’ results helped send the Financial Select fund up 1.5 percent since earnings season began last week, outpacing the 1.3 percent in the S&P 500 Index.

On an absolute share basis, short interest for the XLF is at a 10-year low. As of Dec. 29, about 57 million shares were shorted. That’s the lowest since June 2007, according to data compiled by Bloomberg.

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— With assistance by Marina Girgis, and Karishma Motwani

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