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.
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|
|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.
11 ETFs Once Again On List
Eleven of today's most-shorted ETFs appeared on the list the last time we compiled it, but in different positions, reflecting changing market conditions and trader outlooks.
For example, consider energy ETFs—a common theme between then and now. The last time we looked, natural gas ETFs like the United States Natural Gas Fund LP (UNG) and the VelocityShares 3x Long Natural Gas ETF (UGAZ) topped the chart.
Today, however, crude oil ETFs have attracted the bulk of short interest among energy ETFs. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) is the third-most-shorted ETF, followed by the Direxion Daily Energy Bear 3X Shares (ERY) at No. 7, the VelocityShares 3x Inverse Crude Oil ETN (DWT) at No. 14, the United States Oil Fund LP (USO) at No. 16 and the Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares (DRIP) at No. 18.
Interestingly, energy ETFs of both directions—long as well as inverse plays—have attracted short interest, suggesting no coherent market view: For every trader who thinks oil's about to go down, there's another who believes its price is about to pop.
Shorting The Short
This brings us to our next point: It isn't just inverse energy ETFs traders are shorting. The Direxion Daily Junior Gold Miners Index Bear 3X Shares (JDST), the ProShares Short VIX Short-Term Futures ETF (SVXY) and the Direxion Daily Gold Miners Bear 3x Shares (DUST) also appear on our most-shorted list, at positions Nos. 11, 12 and 20, respectively. (Speaking of geared funds, Direxion's 1.25x leveraged equity portfolios, the PortfolioPlus Developed Markets ETF (PPDM) and the PortfolioPlus Emerging Markets ETF (PPEM), make our list as well.)
Inverse products are themselves bets against areas of the financial markets. They hold futures on the underlying short positions, so that traders can "go short" by "going long" these products. It's a simpler process for those who don't want—or can't—do the shorting themselves (read: "Leveraged & Inverse ETFs: Why 2X Isn’t The 2X You Think").
So why short the short? Doing so allows traders to harness the power of leverage to make an exaggerated bet on the underlying long position.
That's even truer when you consider inverse products—especially leveraged inverse products—suffer from performance drag due to their daily rebalancing. The nature of daily rebalancing being what it is, the returns of a 3x gold miners ETF are not simply the opposite that of a -3x gold miners ETF; DUST, for example, has lost 21% year-to-date, whereas its companion fund, the Direxion Daily Gold Miners Index Bull 3X Shares (NUGT) has returned 13%.
As a result, shorting DUST has been the more lucrative play than going long in NUGT—a fact that, given DUST's proportionally high short interest, has not gone unnoticed by traders.
Short Selling Sector Funds
Other more vanilla products also appear on our most-shorted list, including several State Street Global Advisors-branded sector plays in biotech, financials, homebuilders and more.
The SPDR S&P Biotech ETF (XBI) is the fifth-most-shorted ETF, followed by the SPDR S&P Regional Banking ETF (KRE) at No. 8, the SPDR S&P Homebuilders ETF (XHB) at No. 10 and the SPDR S&P Metals & Mining ETF (XME) at No. 17.
Just like State Street's gargantuan SPY, the SPDR sector ETFs have massive liquidity underpinning them, making them ideal instruments for active traders looking to express tactical viewpoints (read: "Why 'SPY' Is King Of Liquidity").
Other highly shorted ETFs include three iShares products: the interest-rate-sensitive iShares iBoxx USD High Yield Corporate Bond ETF (HYG) at No. 13; the iShares MSCI Mexico ETF (EWW), a trade-war play, at No. 15; and the iShares U.S. Real Estate ETF (IYR) at No. 19, a bet on slowing U.S. economic growth.
Contact Lara Crigger at [email protected]