Even ETF shorts care about exposure.
I love trolling through the short data and seeing how the other half lives. I’m pretty much a long-only, long-term investor (though I’ve put on a short once or twice back in the day). But there’s this whole world of hedge funds and speculators that live on pairs trades and short-selling that I find fascinating.
For a long time, the data has suggested that ETF shorting was largely a liquidity-driven game. The biggest, most liquid ETF in any space got all the short action. It makes sense—bigger ETFs are easier to get a borrow on, and the high level of liquidity means you don’t have to worry so much about the ketchup bottle problem (you can get in, but not out).
Underlying Coming Into Focus
But increasingly I’m starting to see short activity that suggests that the exposure of the underlying, not just size, is important.
Consider the case of the two biggest industrials ETFs, the nearly $9 billion Industrials Select Sector SPDR (XLI | A-88), and the second-place finisher, the $1 billion iShares U.S. Industrials ETF (IYJ | A-92). Over the long term, you could be forgiven for thinking any difference between these two ETFs was incidental: just over 3 percent in total over five years.
And indeed, for most of those five years, short-sellers who wanted to bet against General Electric and Union Pacific and Caterpillar used the giant XLI as their proxy.
But that may be changing. Here’s the chart of the dollars short in the two funds over the last year: