ETF short trading activity can provide insight into regional, index, sector and product-type hedging and Alpha based investing behavior. We follow over 3,500 domestic ETFs with a total short interest of $164 billion in our Black App and Blacklight SaaS platform.
Over the past week we have seen net ETF short covering of -$4.07 billion. There was +$3.66 billion of increased short selling in 30% of the ETFs we cover, -$7.73 billion of increased short covering in 38% and 32% of the ETFs saw no change in short selling. The league table of the largest ETF shorts continues to be led by broad market hedge related ETFs.
Over the past week we saw the Velocity Shares 2X VIX Short Term ETN (TVIX) fall out of the top twenty, dropping from 13 to 30 as we saw -$35 million of short covering and -$70 billion of mark-to-market declines strip -$1.05 billion off its total short interest. The fixed-income ETFs in the top twenty also had some movement with the iShares 20+ Year Treasury Bond ETF climb from the 10th to 8th spot even with -$172 million of short covering as its stock price soared. On the other hand, corporate bond ETFs iShares iBoxx $ Inv Grade Corp Bond ETF (LQD) and Spider BarCap Bloomberg High Yield Bond ETF (JNK) both dropped several spots this week.
The biggest one week increase in ETF short selling occurred in the “hedge ETFs”. The SPY, IVV, IEFA and VWO, which are predominantly used as hedging instruments, made up +$1.55 billion of the +$3.66 of total additional short selling. There were also two gold miner ETFs in the top twenty, with the GDX and NUGT up +$179 million in short selling and +$243 billion of short selling in the treasury bond ETFs BIL, BSV, SHV and SHY.
On the short covering side, the two major corporate bond ETFs, the LQD and HYG, had -$2.8 billion of short covering as the federal government came in the provide liquidity in the corporate bond market. With the VIX trading at record levels, ETF investors look to be finally covering some of their exposure after being down -$1.65 billion, -65%, in mark-to-market losses in March.
There are several ETFs with extremely high Short Interest % of Float, with five ETFs over the 100% level. The rehypothecation and re-loaning of long inventory by brokers and prime brokers has created stock borrow liquidity in high SI % Float ETFs but with that margin-based liquidity there is a higher risk of recall and borrow rate volatility. Particularly at risk is the VXX ETF with $2.9 billion of short interest. If long VXX share holders begin to sell their positions in order to lock in recent mark-to-market unrealized profits we may see a daisy chain effect of recalls in the stock borrow market as brokers are forced to use margined shares to settle long sales.
There are not many high cost ETF stock borrows as brokers can “create to lend” and use margined ETFs to satisfy ETF stock borrow demand. Most of the higher rate ETFs have Short Interest as a % Float significantly above the ETF market’s 27.30% average and are mid-cap or smaller. As short selling activity in the more popular and newly popular ETFs increases, we should see stock borrow rates increase in these smaller market cap ETFs as supply and margin lending opportunities are exhausted.
Want deeper insight into the above analysis?
Contact: [email protected]
Managing Director Predictive Analytics, S3 Partners, LLC
For more information on S3’s reporting, data and analytics solutions, email us at [email protected]. Start your free trial of the BLACK App – the only source of real-time short interest on the Bloomberg Terminal or Thomson Reuters Eikon.
For short side data and access to our research reports go to https://shortsight.com/ .
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.