Sept. Short Report: Pressure On EEM Grows

October 12, 2011

Short sellers put more pressure on EEM as eurozone angst spreads.

Short sellers continued to gang up on riskier investments last month, notably those focused on the developing world and on Europe, as the eurozone’s debt crisis kept festering and even China looked to be affected by a slowdown in global growth.

The number of shares being shorted in iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM) rose by almost 56 percent in September, after rising 38 percent in August, suggesting a deepening pessimism among equity investors.

Also, short interest in the iShares MSCI EAFE Index Fund (NYSEArca: EFA), which is focused on the developed world outside of the U.S. and Canada, rose by more than 54 percent. That came on top of a nearly 16 percent increase in August, according to data compiled by IndexUniverse.

The SPDR Gold Shares (NYSEArca: GLD) meanwhile saw short interest drop by almost a third, in what looks likely to be short-covering toward the end of the month. Gold plunged in connection with a disorderly response to the eurozone’s debt crisis on the part of European policymakers, but seemed to recover its safe-haven status as France and Germany closed ranks.

Indeed, if August saw volatility scream back to the fore in the wake of S&P’s downgrade of U.S. debt, September was marked by a deeper anxiety, as financial markets appeared to be coming to grips with the possibility that the debt-driven economic crisis of the past few years is likely to take years to work through.

Many of the investors shorting EEM probably have exposure to overseas stocks and see ETFs shorts as a good way for them to hedge their bets, says Paul Weisbruch, principal at King of Prussia, Pa.-based Street One Financial, a firm that specializes in evaluating and trading ETFs.

“You can liquidate your international risk and incur tax consequences, or you can just hedge it,” Weisbruch said. “And this is probably hedging activity as opposed to speculating.”

Investor apprehensions about the prospects for resolving the eurozone crisis were also clear in the increasing short interest on the CurrencyShares Euro ETF (NYSEAcra FXE). That ETF saw an increase of 3.91 percent in shorts in September after rising 1.5 percent in August.

Creating EFA Shares To Short Them?

Growing short interest in EFA is worth looking at a bit more closely, as there may be a link between the rising shorts and creations in the fund last month.

The ETF saw $3 billion in inflows during September, making EFA the most popular exchange-traded fund last month. But how does one explain the 54 percent increase in shorts on EFA in September?

One possible explanation is that the tremendous increase in creations of the ETF represents efforts by opportunistic investors to meet demand from short sellers who are betting that countries in the eurozone will fall deeper into a debt sinkhole.

The pattern with EFA, where the increase in short-seller traffic is marching in tandem with the increase in creations during the same month, is similar to what happened with SPDR S&P 500 (NYSEAcra SPY) in August.

SPY pulled in $3.35 billion in fresh assets in August, making it the most popular ETF that month. During the same month, the number of SPY shares being shorted rose 47 percent.

Again, it looked suspiciously like SPY shares were being created to lend out to short sellers.

In September, however, the number of SPY shares short actually fell 12.48 percent.

It’s important to remember that short interest data are buggy, and flawed, as IndexUniverse Director of Research Dave Nadig likes to say.

For example, because of double-counting issues, it’s possible to have more reported short shares than actually exist in the market.

But that said, looking at the short data is still a decent way to gauge market sentiment.

Big Bets
Ticker Name % Float Short 1 Month % Change $Short ($, M)
SPY SPDR S&P 500 61.00 -12.48 49,566.25
IWM iShares Russell 2000 143.07 10.23 17,819.61
QQQ PowerShares QQQ 28.74 15.29 6,110.56
XLE Energy Select SPDR 63.08 -10.89 3,950.24
EEM iShares MSCI Emerging Markets 12.19 55.96 3,230.52
GLD SPDR Gold 4.82 -31.13 3,096.53
XRT SPDR S&P Retail 475.87 -6.50 2,870.31
XLF Financial Select SPDR 60.25 29.44 2,601.92
EFA iShares MSCI EAFE 6.75 54.39 2,331.44
IYR iShares Dow Jones U.S. Real Estate 80.95 -2.69 2,294.61


Really Really Short
Ticker Name % Float Short 1 Month % Change $Short ($, M)
XRT SPDR S&P Retail 475.87 -6.50 2,870.31
XOP SPDR S&P Oil & Gas Exploration & Production 442.34 -7.66 2,189.71
RTH Retail HOLDRS 280.11 -1.67 386.90
FXE CurrencyShares Euro 244.07 3.91 863.25
KRE SPDR KBW Regional Banking 241.96 -1.26 981.29
VXX iPath S&P 500 VIX Short-Term Futures ETN 208.76 -14.60 2,214.47
BNO United States Brent Oil 205.79 40.61 27.84
RKH Regional Bank HOLDRS 173.00 25.70 120.29
GASX Direxion Daily Natural Gas Related Bear 2X Shares 153.11 227.01 4.33
IWM iShares Russell 2000 143.07 10.23 17,819.61


Data is believed to be accurate; however, transient market data is often subject to subsequent revision and correction by the exchanges.

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