Investors are paying more attention than ever to the use of selling short shares. The risks associated with short selling have never been so clear, as the recent short press on GameStop (NYSE: GME) and show other stocks. Some investors are looking for other heavily shortened bonds to see if they can repeat the success of pushing up GameStop’s share price so dramatically, at least temporarily.
While many short sellers focus on individual stocks, others prefer to work with exchange traded funds. Three ETFs in particular have seen extraordinarily large interest rates in recent times, and some are asking if there is an opportunity to jump on the short bandwagon or to bet on shorts by buying shares. Let’s count down the ETFs with the largest percentage of their floats sold.
Image Source: Getty Images.
3. SPDR S&P Oil and gas exploration and production
In place of the bronze medal on the short-selling ETF podium, it is currently SPDR S&P oil and gas exploration and production ETF (NEW: XOP). It currently has a short interest of approximately 35.6 million shares. This amounts to 91% of the outstanding shares of the fund.
It is easy to understand why investors are targeting this ETF. Energy stocks have experienced a lot of pain over the past twelve months, and the ETF was down as much as 60% shortly after the start of the COVID-19 pandemic. Oil prices even went short in the negative, resulting in smaller exploration and production companies, and even shaking many oil heads.
More recently, however, short sellers have been penalized by the oil and gas supply ETF. Shares have recovered 66% over the past three months as oil prices recovered above $ 50 a barrel. Industry analysts increasingly believe that market conditions could improve in the long run.
Nevertheless, there is still a lot of uncertainty in the oil and gas sector. This explains why so many people bet against the E&P segment. If the energy industry can not sustain its recent recovery, a new downward wave for oil and gas supplies could work in favor of short sellers.
2. SPDR S&P Biotech
SPDR S&P Biotech (NYSEMKT: XBI) earns second place in this list of top-selling ETFs. The fund holds an almighty 103% of its 48.8 million outstanding shares sold short. This is possible because stocks can be lent more than once, and the liquidity that results from the creation and redemption of ETF stocks offers institutional investors far more flexibility than they get from the short selling of individual stocks.
The biotech ETF is weighted equally, and one reason it has received attention is that it has a number of stocks that short sellers have focused on. For example, Ligand Pharmaceutical Products (NASDAQ: LGND) has been in the spotlight of short sales lately, with 62% of its outstanding shares sold short. Demand for Captisol, a cyclodextrin product used for the stability and solubility of active pharmaceutical ingredients, increased last year due to COVID-19 related development. Some wonder if the peak could be short-lived.
That said, SPDR S&P Biotech has delivered a strong performance, rising by more than 80% in the past year and by 15% since the beginning of 2021. It is difficult to predict a major reversal that will justify the interest of short sellers in the ETF.
1. SPDR S&P Retail
The first place is easy SPDR S&P Retail ETF (NYSEMKT: XRT). The ETF recently had an incredible short-term interest rate ratio of 465%, with more than 12 million short shares and only 2.6 million outstanding.
The explanation for interest among short sellers here is even more obvious. The equivalent ETF counts GameStop under its ownership. When short-selling investors could not borrow GameStop shares directly, it made much more sense to go through this ETF indirectly. When GameStop’s share price rose, it accounted for more than 20% of the ETF’s assets.
The SPDR S&P Retail ETF may seem like a fairly short candidate given the misery retailers have had. The fund has actually risen by almost 80% in the past year, as it owns many retailers that have had an increase in demand during the COVID-19 pandemic. Recently, the fund did what GameStop short sellers wanted, with the shares of the video game retailer. But in a supposedly dying industry, the ETF has performed fairly well.
Beware of short sales
Matches against stocks can be lucrative, but they involve a lot of risks. Even if your short selling is through a diversified ETF, you need to be aware of the losses you could suffer if you are wrong.
It is unlikely that it will be necessary for these ETFs. The gains these ETFs have given their shareholders in recent times underscore just how dangerous short selling can be.