We are tracking over two thousand ETFâ€™s with $167 billion of Short Interest in the domestic ETF market. Overall, we saw a -$626 billion of incremental net short covering in December as short sellers increased their short exposure on 49% and decreased their exposure on 44% of the 2,162 domestic ETFâ€™s that we cover (7% had no change in shares shorted).
The U.S. traded ETFâ€™s with the largest short interest (minimum short interest $5 mm):
The top three most shorted ETFs in December were bond ETFs as investors are looking for interest rate movement leading into year-end. There was over $3 billion worth of new December short selling in the iShares iBoxx $ High Yield Corp Bond ETF (HYG), iShares iBoxx $ Investment Grade Corp Bond ETF (LQD) and the iShares Core U.S. Aggregate Bond ETF (AGG).
The U.S. traded ETFâ€™s with the largest increase in $ amount of shares shorted (minimum short interest $5 mm):
Short sellers were actively covering their short ETF exposure in worldwide larger cap stocks. There was over $1.5 billion of short covering in the iShares MSCI EAFE ETF (EFA) and Spider S&P 500 ETF (SPY). While shorts were actively shorting the two largest corporate bond ETFs (HYG & LQD) and an aggregate bond ETF (AGG) they were covering $660 million of their long term U.S. bond exposure via the iShares 20+ Year treasury Bond ETF (TLT).
The U.S. traded ETFâ€™s with the largest decrease in $ amount of shares shorted (minimum short interest $5 mm):
Short Interest as a % of Float is not as useful a metric for ETFâ€™s as it is for equities. The ability to create and redeem ETFâ€™s on a daily basis causes difficulty in comparisons as the Float number used in the denominator of the calculation changes daily. Also, the constant rehypothecation of ETFâ€™s by Prime Brokers can create multiple stock borrows/short sales from a single long share. The ability to create several stock borrows from one share can inflate the SI % of Float for some ETFâ€™s.
Short Interest as a % of Float: The total number of shares shorted divided by the companyâ€™s float. Equity SI % of Float usually tops out at the 40% to 60% range due to lendability constraints, but ETF SI % of Float can top the 100% level.
The U.S. traded ETFâ€™s with the highest Short Interest as a % of Float (minimum short interest $5 mm):
Because brokers will create ETFâ€™s to lend once lending rates climb to profitable levels there are seldom ETF stock borrow fees over the 20% fee level as supply of the most popular short ETFâ€™s is usually increasing. But because the smaller cap ETFâ€™s have limited stock loan availability and are more difficult to create and hedge properly the lower end of the lending spectrum is slightly more expensive than equities. The median equity stock loan is 0.30% fee while the median domestic ETF stock loan is 1.04% fee.
Stock Borrow Fee: The annualized stock borrow fee charged by brokers to short sellers. Short sellers pay a fee to borrow stock to cover the settlement of their short sales. Stock loan is a supply\demand market; if supply gets tight or demand spikes borrow fees are bound to go up.
The U.S. traded ETFâ€™s with the most expensive stock borrow fees (min short int $5 mm):
There are only three ETFâ€™s worth daily stock borrow expenses over $100 thousand because, for the most part, the most shorted ETFâ€™s are at or near General Collateral stock loan levels. The total daily expense for shorting ETFâ€™s in the U.S. market is $2.5 million per day, which equates to $901 million per year.
Daily Financing Costs: The daily cost to borrow stock is the $ Notional of the short position * Stock Borrow Fee / 360 days. The amount of total daily financing costs depends on the size of the short, stock price and stock borrow fee.
The U.S. traded ETFâ€™s with the largest daily stock borrow expense (minimum short interest $5 mm):Â
Short sellers must take into consideration the cost of the underlying stock borrow as well as the Short Interest as a % of Float when making their short investment decisions. High stock borrow costs can eat into expected Alpha making an attractive trade fall below investment thresholds. Or an unexpected increase in stock borrow rates can turn a home-run trade into a run of the mill single.
High daily financing costs hit a short sellerâ€™s bottom line directly, if a stockâ€™s price plateaus the trader will be seeing red financing numbers that are not being offset by daily mark-to-market profits. If these financing costs are not accounted for properly on a daily basis, what may look like a profitable trade may in actuality be a loser.
When sorting through short side candidates a quick look at SI % Float can determine whether a potential investment is early or late to the trade. If SI % Float is already high, the trade is already relatively crowded there may a sudden and dangerous stampede for the exits if the stock rallies. A low SI % Float may indicate that the investor is early to the game and is able to covertly build a position and sample most of the early Alpha exclusively.
Using our Black App or our Blacklight SaaS platform, an investor can see up-to-date short interest, stock borrow fees\cost and SI % Float as well as daily changes in shares shorted for individual securities, sectors, countries or regions and get ahead of short selling or short covering trends. Both long and short side investors can benefit by seeing short trading action well before regulatory reported numbers hit the street after a two week delay.
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Managing Director Predictive Analytics, S3 Partners, LLC
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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 (â€śS3 Partnersâ€ť) 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.