According to ETF.com there are 438 Fixed Income ETFs with $1.05 trillion of assets under advisement. These ETFs have $21.95 billion of short interest with more than half the short selling activity occurring in Corporate Bond ETFs. For the year, Fixed Income ETF short exposure has declined by -$488 million, -$381 decrease over the last week alone. Below are the top twenty most shorted domestic Fixed Income ETFs.
Corporate Bond ETFs are the most shorted group in the sector with the iShares iBoxx USD High Yield Corp Bond ETF (HYG), iShares iBoxx USD Investment Grade Corp Bond ETF (LQD) and Spider Bloomberg Barclays High Yield Bond ETF (JNK) the largest shorts in the group. Overall, we have seen a $2.4 billion decline in short exposure in the group as short sellers rotate out of Corporate Bond ETFs and into U.S. Treasury ETFs.
Short selling in the U.S. Treasury Bond ETF group is highly concentrated in three securities. The iShares 20+ Year Treasury Bond ETF (TLT), iShares 7-10 Year Treasury Bond ETF (IEF) and iShares TIPS Bond ETF (TIP) make up 84% of all the short exposure in the group. U.S. Treasury Bond ETF short sellers look to be shorting the longer end of the curve in anticipation of rising interest rates and inflation protected bonds in anticipation of inflation rising.
International Bond ETFs is the third most shorted group in the sector with the iShares JPM USD Emerging Markets Bond ETF (EMB) by far the most shorted ETF in the group. EMB short exposure has declined by other a third this year even though shorts are up +$30 million in mark-to-market profits, +2.6%, for the year.
Short exposure in the broader based Fixed Income Bond ETFs has declined by more than half in 2020 as short sellers look for more precise short side ETF investing. Short exposure in thee iShares Core U.S. Aggregate Bond ETF (AGG) has declined by -75% in 2020.
Municipal Bond ETF short exposure grew by +264% in 2020 as short sellers position themselves for price weakness in the group as state and local governments feel the fiscal pain of the Covid pandemic. The largest ETF by assets under management is also the largest short by short interest, the iShares National Muni Bond ETF (MUB) is the preferred choice for both the long and short side of the market.
The smallest group in the Fixed Income ETF sector is the Mortgage Backed Group. Lower interest rates and a strong housing market have been a positive tail wind in this sector with the iShares MBS ETF (MBB) up +3.9% for the year. MBB shorts are flat for the year as they have been shorting into MBB’s price weakness since May and generally maintaining their overall short exposure.
Investors looking for Fixed Income exposure are using these ETFs to diversify their portfolio instead of buying individual Fixed Income instruments and as a hedge to a portfolio of Fixed Income securities. In addition, the ETFs can be used as the “canary in the coal mine” to illuminate overall market sentiment and see what the “equity side” is thinking about the Fixed Income market. This is especially true in the most shorted Fixed Income ETFs, short selling and short covering activity in the HYG, LQD, TLT, JNK, IEF and EMB can provide insight into Fixed Income market direction and investor expectations in regards to yield, duration, credit and jurisdictional risk in the Fixed Income Market.
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The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC (“S3 Partners”) to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks, and merits, as well as the legal, tax, accounting, and investment consequences, of such decisions.