Everything's Big In Texas, Including Short Interest In Its Banks

George Strait once crooned that all of his exes live in Texas. These days, some of short sellers favorite targets in the banking space hail from the Lone Star State as bearish traders are betting the worst is not over for oil prices.

For exchange traded funds investors, this is a potentially important theme because several well-known regional bank ETFs are chock full of Texas-based banks, including the PowerShares KBW Regional Banking Portfolio KBWR.

“Bearish bets have shot up 35 percent on average this year among the 10 most-shorted stocks in the KBW Regional Banking Index, data compiled by Bloomberg and Markit show. Cullen/Frost Bankers Inc. CFR and Prosperity Bancshares Inc. PB in Texas have seen short interest surge about 60 percent,” according to Bloomberg. 

The aforementioned KBWR tracks the KBW Nasdaq Regional Banking Index. Cullen/Frost and Prosperity are both members of that ETF's top 10 lineup, combining for 4.3 percent of the fund's weight. Texas Capital Bancshares Inc. TCBI is KBWR's tenth-largest holding at a weight of almost 2.1 percent.

KBWR's seventh-largest holding is BOK Financial Corp. BOKF. That company has operations in Oklahoma and Texas, among other states, meaning it could also be vulnerable to another retreat in oil prices though the company was not mentioned in the Bloomberg piece.

“Energy loans account for 15 percent of Cullen/Frost’s portfolio, while they make up 7 percent of Prosperity’s, according to Moss. Of the 10 most shorted regional banks, the majority do business in states like Texas, Oklahoma and Arkansas, centers of the drilling industry,” according to Bloomberg.

Interestingly, KBWR has added nearly $60.5 million of its $108.5 million in assets in just the past 30 days. Only six other PowerShares ETFs have added more new assets over that period, according to issuer data. 

That could be a sign short sellers are taking aim at the ETF as well because when short sellers want shares of an ETF, new shares are created, giving the impression the fund is adding new assets.

KBWR is up seven percent over the past month, an impressive showing considering the Federal Reserve passed on raising interest rates earlier this month. Regional bank stocks are among the most positively correlated to rising rates.