Markets

Aug. Short Report: Pressure On EEM, SPY Spike

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Short-sellers came out in droves in August—one of the most volatile months in market history—turning their attention to staples in the exchange-traded fund market, such as the SPDR S&P 500 ETF (NYSEArca:SPY) and the iShares MSCI Emerging Markets Index Fund (NYSEArca:EEM).

Investors also appeared to be covering short positions on the SPDR Gold Shares (NYSEArca:GLD) in another sign they were pulling risk off the table and seeking safe havens in the aftermath of Standard & Poor’s downgrade of long-term U.S. debt on Aug. 5.

The number of SPY shares being shorted rose by almost 50 percent, lifting the percentage of shares short relative to the ETF’s total outstanding long float to 66 percent from just under 50 percent in July. The number of EEM shares short meanwhile shot up almost 40 percent after dropping by a quarter in July, according to data compiled by IndexUniverse.

The S&P downgrade—which followed difficult negotiations in Washington, D.C. that mixed the fate of the U.S. government’s borrowing limit with debate over longer-term fiscal policies—added to an already-growing sense that the U.S. economy was stalling. Markets were left guessing what might happen next, and the Federal Reserve also gave no clear signal it might try to prop up growth, adding to uncertainty.

The lack of clarity fueled a move into gold early in the month that briefly made GLD the single biggest ETF in the world. As noted, those investment flows were echoed in the shorting market, with the number of GLD shares being sold short down 11 percent last month, after rising 5 percent in July.

Buying SPY To Lend It?

A noteworthy side note to the spiking short interest in SPY is the fact that SPY was also the single most popular ETF last month, hauling in $3.35 billion in fresh assets.

SPY is the biggest ETF in the world, so it’s hardly a surprise that it garners more assets than any other ETF. But when it keeps pulling in assets—even during a month when its price drops by 5.5 percent—it does turn some heads.

Some ETF traders say these SPY creations may well be a reflection of the increased interest in shorting the shares. In other words, if short interest is strong enough, an authorized participant might actually create new SPY shares for buyers who immediately lend them out to investors and traders that want to short the ETF.

High Short Interest

Atop IndexUniverse’s “Really Really Short” table were the usual suspects:the SPDR S&P Retail ETF (NYSEArca:XRT) and the SPDR Oil & Gas Exploration & Production ETF (NYSEArca:XOP).

The number of XRT shares short rose 13 percent in August after dropping almost 8 percent in July—a possible reflection of investors positioning themselves for a softening of the economic outlook.

Also, the percentage of shares short relative to its outstanding long float rose to just over 600 percent from just under 500 percent in the prior month. XRT, widely used by traders and large investors for hedging, has volatile assets under management as well as short interest, leading some to question its viability.

The fund’s sponsor has always maintained that long-term investors still get the returns of the underlying index, minus expenses, as well as the tax advantages of an ETF—no matter what other investors are using XRT for. IndexUniverse Global Head of Editorial Matt Hougan also took on XRT’s skeptics in a blog published about a year ago titled “Can An ETF Collapse? No.”

The number of XOP shares short meanwhile rose almost 20 percent after falling almost 25 percent in July, in a possible reflection of falling oil prices.

The United States Oil Fund (NYSEArca:USO), an ETF based on front-month NYMEX crude oil futures, fell almost 8 percent last month, in part because of views that demand for motor fuels was likely to drop if the economy keeps slowing.

Also, the end of Moammar Gadhafi’s rule in Libya is seen as paving the way for Libya’s 1.6 million barrels of oil per day of production of coming back on line, bringing a measure of relief to a tight supply/demand balance in world oil markets.

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Big Bets
Ticker Name % Float Short 1 Month % Change $Short ($, M)
SPY SPDR S&P 500 66.62 47.99 61,132.20
IWM iShares Russell 2000 135.90 12.78 18,265.90
QQQ PowerShares QQQ 26.41 17.88 5,858.41
XLE Energy Select SPDR 61.25 31.88 5,199.48
GLD SPDR Gold 6.99 -11.04 5,055.10
XRT SPDR S&P Retail 603.78 13.11 3,294.24
XOP SPDR S&P Oil & Gas Exploration & Production 364.01 18.98 2,969.50
IYR iShares Dow Jones U.S. Real Estate 89.07 -8.34 2,668.02
EEM iShares MSCI Emerging Markets 7.53 38.73 2,523.24
XLF Financial Select SPDR 43.97 78.46 2,259.68

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Really Really Short
Ticker Name % Float Short 1 Month % Change $Short ($, M)
XRT SPDR S&P Retail 603.78 13.11 3,294.24
XOP SPDR S&P Oil & Gas Exploration & Production 364.01 18.98 2,969.50
FXE CurrencyShares Euro 355.69 1.52 890.87
RTH Retail HOLDRS 284.66 -11.36 400.40
KRE SPDR KBW Regional Banking 277.41 15.86 1,135.35
SOXX iShares PHLX SOX Semiconductor 226.51 9.28 350.39
VXX iPath S&P 500 VIX Short-Term Futures ETN 200.00 -3.33 1,892.97
RKH Regional Bank HOLDRS 137.63 -6.23 105.83
IWM iShares Russell 2000 135.90 12.78 18,265.90
UTH Utilities HOLDRS 129.81 2.08 59.33

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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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Copyright ® 2011 IndexUniverse LLC . All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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