Coming Up Short?

August 11, 2004

With all this talk about the ease and usefulness of shorting ETFs, why is it that many ETFs are nearly impossible to short? The story behind the story.

In March of this year, with the Federal Reserve poised to raise interest rates for the first time in years, investors began to bet big against bonds using ETFs. How big? According to prominent ETF consultant Gary Gastineau, short interest in the popular iShares Lehman 20-Plus Treasury Bond Fund (TLT) surged to an astounding 697% of total shares outstanding.

In one sense, it was a triumph.The very fact that short interest could surge so high without disrupting trading points to the unique flexibility that ETFs offer.

But for Dave Fry, editor of the newsletter ETF Digest, that triumph was hollow. When Fry recommended to his subscribers that they short TLT, the response was unanimous.

"Schwab, Brown & Co., Fidelity, Scottrade, T.D. Waterhouse: it didn't matter," said Fry. "My readers - retail investors - were unable to find shares to short."

As his subscribers probed, they found that the problem extended to other ETFs, including most of the country-specific funds. Fry couldn't believe it.

"Retail investors go to the websites promoting ETFs and shorting is one of the features they read about," Fry said. "But when the time comes to short 100 or 1000 shares, they can't do it."

In Fry's opinion, it's misleading for the industry to tout the shortablitity of ETFs when, in reality, that benefit is hard to deliver.

Some of the ETFs that are the most appealing short targets (like individual country ETFs and at the moment fixed-income ETFs), are among the most difficult to short. Although the situation varies from day to day and from brokerage to brokerage, traders, specialists and ETF advisors suggest that the following ETFs can be easy/hard to short.

Easy to Short

HARD TO SHORT

SPY - S&P Depository Receipts

TLT - iShares Lehman 20+ Year Treasury Bond

DIA - Diamonds Trust

EFA - iShares MSCI EAFE Index

QQQ - Nasdaq 100 Trust

EWZ - iShares MSCI Brazil

IWM - iShares Russell 2000

SMH - Semiconductor HOLDRs

EEM - iShares Emerging Markets

IYV - iShares Dow Jones US Internet Index

 

 

 

EASY TO SHORT

HARD TO SHORT

Large Share Quantities

Small Share Quantities

ETFs with corresponding futures

ETFS without futures

Domestic

Foreign

Large Float

Small Float

Established

Recently Introduced

 

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