Why Is The SPDR Retail ETF (XRT) 600% Short?

June 10, 2011


It would be easy to read too much into this chart. That little pop over $54 in the fund’s NAV on May 31 could be related to the 3.35 million shares created that day. But honestly, while $175 million is a lot of money for an asset manager, in the grand scheme of things, it’s nowhere near enough to move the basket of 100 retail stocks APs needed to purchase on the day. More buyers than sellers help to move prices, but there’s no tail wagging the dog here. Barnes & Noble, the fund’s largest holding at 1.72 percent, trades $50 million worth of stock every single trading day. An extra $3 in volume surely matters, but it’s definitely not driving the bus.

Instead, what’s happening here is people are making broad speculative trades, and then pulling them.

So, if you’re an AP in XRT, how do you handle this? If you’ve sold that 1 million shares, do you really feel like you need to go roll up that position early, given that it’s highly likely there’ll be a redemption tomorrow that balances your book? Sure, you’ll make the offsetting trade to hedge your position -- buying up all the actual retail stocks so you’re not actually short the retail sector as naked exposure. But will you bother to go to State Street and do the create, pay the transaction costs, knowing there’s a good chance you’ll just be back tomorrow to do the opposite trade?

Of course not.

For investors, all these intramarket shenanigans are actually meaningless, but have a nasty tendency to clog up the headlines. As an investor, all I care about is whether XRT delivers on its core promise to investors, and it does that in spades. The fund hasn’t traded to a significant premium or discount to its NAV in years.


XRT Premium


In fact, all of this back and forth in creation and redemption is the reason it’s traded at ever-narrower and narrower premiums and discounts.

It is, in fact, the whole point of creation and redemption activity.


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