S3 Analytics: Most Shorted ETFs had $21 Billion of October Short Selling

As markets and sectors declined, the use of ETFs as hedges increased substantially in October with ETF short interest increasing by $11.7 billion, to $176.5 billion, a 7.1% increase in size. There is a large concentration of short interest in a handful of ETFs, with the top twenty-five most shorted ETFs making up 75% of total short interest or $131.8 billion. Total short interest in these top twenty-five ETFs grew by $12.1 billion over the last month.

As expected the top three most shorted ETFs are made up of the major indices, the S&P 500 (SPY), the Nasdaq (QQQ) and the Russell 2000 (IWM). Surprisingly, short selling increased in the SPY and QQQ, but declined in the broader IWM.

As a hedge, shorting ETFs produced anticipated results, with the S&P 500 down 7.9%; SPY short sellers earned an 8.20% return; QQQ short sellers 9.80% return and IWM short sellers 11.34% return. In aggregate the top twenty-five most shorted ETFs returned $9.2 billion in mark-to-market profits, or +6.99%, in October. There were several short ETFs that had mark-to-market losses in October; the Utilities Select Sector Spider ETF (XLU) was down $75 million, or-2.19%; the iPath S&P 500 VIX Short Term Futures ETN (VXX) was down $406 million or -32.19%; the Consumer staples Select Sector Spider ETF (XLP) was down $50 million, or-3.15%; the iShares MSCI Brazil ETF (EWZ) was down $267 million, or -17.49%; and the Spider Gold Trust ETF (GLS) was down $42 million, or -2.82%.

Looking at overall ETF short selling and short covering, the top twenty-five most shorted ETFs had $21.3 billion in additional short selling in October. As the markets declined in October, traders increased their ETF hedges substantially. The most sold short ETFs in October were the Spider S&P 500 ETF (SPY), Invesco Nasdaq ETF (QQQ), iShares MSCI EAFE ETF (EFA), the Energy Select Sector Spider ETF (XLE), the iPath S&P 500 VIX S/T Futures ETN (VXX), the Spider Healthcare ETF (XLV) and the iShs JPM $ Emerging Markets Bond Fund (EMB). These seven ETF’s had $21.4 billion of net short sales in October.

On the other side of the ledger, there were only four ETFs that had net short covering in October. The iShares Russell 2000 ETF (IWM); iShs iBoxx $ High Yield Corporate Bond ETF (HYG); Spider S&P Regional Banking ETF (KRE) and the iShares 20+ Year Treasury Bond ETF (TLT) had $2.4 billion in aggregate short covering in October.

In October, short sellers were looking for more short exposure in the more crowded equities (both retail and indexed), energy and healthcare stocks; international stocks and bonds;  and VIX volatility while decreasing short exposure to the broader U.S. market and U.S. interest rate related securities. If the market stabilizes and continues its rally, there may be $21 billion of October short sales ready to be covered and boost the rally even further.

Want deeper insight into the above analysis?

Contact:  Ihor.Dusaniwsky@S3Partners.net

Managing Director Predictive Analytics, S3 Partners, LLC

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