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Retail Fund's Big Flows Fueled By Shorts

July 24, 2014
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XRTSPDR S&P Retail
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Consumer Cyclicals ETFs

XRT had a monster day for new money. Which is probably all short. Welcome to Bizarre Land.

The SPDR S&P 500 Retail ETF (XRT | A-46) gives me more heartburn than any other ETF. It’s a poster child for bizarre ETF trading activity. The past few days are a prime example.

The headline (like a lot of headlines these days) came in the form of flows. XRT pulled in an additional 24 percent in assets yesterday, as you can see in our daily ETF flows article.

XRTFlows

That’s nearly $140 million in new money. That’s got to mean people are bullish on the retail sector heading into the bulk of earnings season, right? Time to pile in with the herd?

Nope. Exactly wrong. XRT has the unique distinction of consistently being the single-most-shorted ETF on the market. I wrote about its bizarre fascination for short-sellers back in 2009, and the position hasn’t really changed. XRT remains several hundred percent short:

XRTShorts

The paradox of the “over 100 percent short” position is easily explained when you recognize that any security can be lent multiple times. I lend you my shares of XRT to short, you sell them, then the guy you sold them to lends them out again.

Only the last person in the chain actually “owns” the shares in terms of being able to redeem them with the issuer. Everyone else has “encumbered” ownership and would need to recall their shares in order to show up at the window asking for a basket of retail stocks.

There’s a great paper on this by Credit Suisse that walks through the process, but I’ll crib the best chart here:

 

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