How New Short Squeeze ETF Can Juice Returns

March 29, 2017

It’s easy to love the premise of the just-launched Active Alts Contrarian ETF (SQZZ). We first started writing about it 2014, for Pete’s sake: an ETF that deliberately invests in individual stocks that are so out of favor, they’ve been shorted to the point where the mythical short squeeze might occur.

The idea is that a stock can get so over-shorted that any positive news causes so much pain to short-sellers that they give up and cover their shorts, driving the price up even further.

It’s always fun to be right on something like this, and to be the guy who zigs when the market zags. The challenge, of course, is you have to be more right than the short-sellers. With SQZZ now in the market, I thought it would be interesting to look at what the fund (which is 100% actively managed) is actually doing right now, and whether it’s poised to deliver on the premise.

First: About Squeezes

For a stock to experience a big pop, you need to have a few things:

  1. A lot of people shorting it
  2. A news event precipitating the squeeze

The first is relatively easy to suss out. Quick and dirty, I ran the short interest on all the NYSE stocks, and you can get a quick list of the stocks people really seem to hate. There are two easy ways to look at it. One is by how much of the float is actually short:

The other is by how much is short relative to an average day’s trading volume:

 

Advertisement

Find your next ETF

CLEAR FILTER