Traders have lost their faith in retail. According to ETF.com's latest list of the 20 most-shorted ETFs, the SPDR S&P Retail ETF (XRT) is the most-shorted ETF on the market, by a wide margin, with short interest totaling a whopping 526% of its assets.
Traders are also making substantial bets against semiconductors, energy, homebuilders and other sector-specific plays.
Understanding Short Selling
"Shorting" is the process of borrowing a security, selling it, then buying it back at a later date—hopefully at a lower price.
If done correctly, shorting allows traders to profit from declines in price. But if a shorted security instead rises in price, the trader must buy back the security at a higher price, eating the difference.
Theoretically, there's no limit to how large those losses can grow, because there's no limit to how high a security's price can climb.
There's also no limit to how high an ETF's short interest can grow, because shares can be borrowed and shorted indefinitely. As such, it's possible to have short interest in a fund exceed 100% of its assets under management (as several of the ETFs on our list do).
Why do traders short ETFs? It's complicated. Sometimes they do so for hedging purposes, or because an ETF is part of a sophisticated pair trade. But in many cases, short positions are outright bearish bets against an ETF, in the expectation that prices will fall—meaning, when short interest rises, it usually signals traders expect the ETF's price to drop soon.
Bearish Bet On Retail
This brings us back to our list. The 20 most-shorted ETFs are:
| 20 Most Shorted ETFs, By % Of Assets | ||
| Ticker | Fund | AUM Short |
| XRT | SPDR S&P Retail ETF | 525.73% |
| SMH | VanEck Vectors Semiconductor ETF | 140.78% |
| XOP | SPDR S&P Oil & Gas Exploration & Production ETF | 116.59% |
| PPDM | PortfolioPlus Developed Markets ETF | 100.11% |
| XBI | SPDR S&P BIOTECH ETF | 79.56% |
| PPEM | PortfolioPlus Emerging Markets ETF | 69.10% |
| ERY | Direxion Daily Energy Bear 3X Shares | 61.24% |
| KRE | SPDR S&P Regional Banking ETF | 53.43% |
| SOXX | iShares PHLX Semiconductor ETF | 52.80% |
| XHB | SPDR S&P Homebuilders ETF | 52.69% |
| JDST | Direxion Daily Junior Gold Miners Index Bear 3X Shares | 51.12% |
| SVXY | ProShares Short VIX Short-Term Futures ETF | 44.07% |
| HYG | iShares iBoxx $ High Yield Corporate Bond ETF | 42.16% |
| DWT | VelocityShares 3x Inverse Crude Oil ETN | 41.49% |
| EWW | iShares MSCI Mexico ETF | 37.44% |
| USO | United States Oil Fund LP | 34.16% |
| XME | SPDR S&P Metals & Mining ETF | 34.04% |
| DRIP | Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares | 33.34% |
| IYR | iShares U.S. Real Estate ETF | 32.90% |
| DUST | Direxion Daily Gold Miners Bear 3x Shares | 31.80% |
Source: Bloomberg; data current as of March 31, 2019
More than 32 million shares of XRT are currently short, compared to just 6.1 million total shares outstanding.
That's not too surprising, given the ongoing "retailpocalypse," in which big brick-and-mortar retailers, struggling with too much debt and too little sales, have been forced to shutter stores en masse. In fact, XRT was the second-most-shorted ETF the last time we compiled this list (read: "Most Shorted ETFs of 2018").
Traders Keep Shorting Semiconductors
Also of note: The last time we considered short interest in ETFs, the VanEck Vectors Semiconductor ETF (SMH) was the top-most-shorted ETF; today, it ranks in second place, with short interest comprising 141% of its total assets.
SMH has 11.5 million shares shorted, compared to 8.2 million shares outstanding.
That SMH remains near the top of this list illustrates traders' persistent perception that the tech rally will leave semiconductor stocks behind—not a bad bet, as SMH has returned 12% year-to-date, while the largest broad tech ETF, the Vanguard Information Technology ETF (VGT), has provided twice that return.
Traders also have large positions in the iShares PHLX Semiconductor ETF (SOXX), the largest competitor to SMH. As the ninth-most-shorted ETF, SOXX has roughly 3 million shares shorted, compared with 5.6 million shares outstanding.
