Why Is The SPDR Retail ETF (XRT) 600% Short?

June 10, 2011

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Watching flows in and out of XRT and its monster short position might give investors pause. It shouldn’t.


If ever there was a security that highlights the difference between traders and long-term investors, then the SPDR S&P Retail ETF (NYSEArca: XRT) is it. XRT is somewhat famous in ETF circles. It’s often the most heavily shorted ETF in the market.

In fact, as of the latest data, it’s 626 percent short—a number that borders on mythological. But it’s actually not so unusual for ETFs, where creation, redemption and settlement-timing mismatches can create seemingly impossible data like that.

But even though XRT’s short interest seems high, it’s surprisingly consistent.


XRT Short Interest


Since that spike in mid-2009, between 60 million and 80 million shares of XRT have more or less been notionally short. But remember, short interest reporting is incredibly buggy, and not timely. It’s self-reported information produced every two weeks, with a lag. So you can’t look at the end of this chart and say “aha!” as short interest has gone up.

It’s also possible that the short interest represents shares that may in fact simply not yet have been created for delivery by market makers. If a market maker sells 1 million shares of XRT it doesn’t actually own, it doesn’t have to actually do the creation to make good on that delivery for five days. More than likely, however, the market maker is completely hedged by buying and holding the underlying basket while maintaining his short position in the ETF. More on that in a minute.

XRT showed up on my screen again in the past few weeks because we track the daily ETF fund flows at IndexUniverse, and the action inside XRT has been head-scratching. Here are the shares outstanding for XRT over the past month:


XRT Flows


What the blue line tells us is that investors—or rather, authorized participants—doubled the size of XRT within a few days through creations, and then quickly bought shares of XRT off the secondary market to redeem.



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