Investors are paying more attention than ever to the practice of short selling shares. The risks involved in short selling have never been more evident, such as the recent short tightening GameStop (NYSE: GME) and other stock shows. Now, some investors are looking for other heavily sold bonds to see if they can double their success in pushing GameStop’s stock price up so dramatically, at least temporarily.
While many short sellers focus on individual stocks, others prefer to work with exchange-traded funds. Three ETFs in particular have seen extremely large numbers of interest recently uncovered, and some wonder whether there is an opportunity to enter the short sale or to bet against short by buying shares. Let’s count down the ETFs with the highest percentage of their short sold floats.
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3. SPDR S&P Oil and Gas Exploration and Production
In place of the bronze medal on the short sold ETF podium is now SPDR S&P Exploration and Production of Oil and Gas ETF (NYSEMKT: XOP). Currently, it has a sold stake of around 35.6 million shares. This corresponds to 91% of the fund’s approximately 39.1 million outstanding shares.
It is easy to understand why investors are targeting this ETF. Energy stocks have suffered greatly in the past 12 months, and the ETF has dropped by up to 60% just after the start of the COVID-19 pandemic. Oil prices even declined briefly briefly, causing smaller exploration and production companies to sink and even shaking many large oil companies.
More recently, however, short sellers have been punished by the ETF for oil and gas stocks. The stock has rebounded 66% in the past three months, with oil prices rebounding above the $ 50 a barrel mark. Industry analysts increasingly believe that market conditions may be improving in the long run.
However, there are still many uncertainties in the oil and gas sector. This explains why so many people bet against the E&P segment. If the energy sector cannot sustain its recent recovery, a further wave of falling oil and gas inventories may work in favor of short sellers.
2. SPDR S&P Biotech
SPDR S&P Biotech (NYSEMKT: XBI) wins second place in this list of the main short-selling ETFs. The fund has a whopping 103% of its 48.8 million outstanding shares sold short. This is possible because the shares can be borrowed more than once, and the liquidity that results from the creation and redemption of ETF shares gives institutional investors much more flexibility than they obtain from short selling individual shares.
The biotechnological ETF has the same weight, and one of the reasons he drew attention is that it has some stocks that short sellers have focused on. For example, Ligand Pharmaceuticals (NASDAQ: LGND) has been at the center of short selling recently, with 62% of its outstanding shares sold short in mid-January. Demand for Captisol, a cyclodextrin product used for stability and solubility of active pharmaceutical ingredients, increased last year due to the development related to COVID-19. Some wonder if this peak could be short-lived.
That said, SPDR S&P Biotech performed strongly, growing more than 80% last year and 15% only since the beginning of 2021. It is difficult to predict a major reversal that would justify the interest of short sellers in the ETF.
1. SPDR S&P Retail
Taking first place easily is SPDR S&P Retail ETF (NYSEMKT: XRT). The ETF had an unbelievable short-term interest rate of 465% recently, with more than 12 million shares sold and only 2.6 million outstanding.
The explanation for the interest among short sellers is even more obvious. The equal weight ETF counts GameStop among its holdings. When short-selling investors could not directly borrow GameStop shares, going through that ETF indirectly made a lot more sense. When GameStop’s stock price jumped, it briefly accounted for more than 20% of ETF assets.
The ETDR SPDR S&P Retail may seem like a reasonable candidate, considering the difficulties that retailers have faced. But the fund increased by almost 80% last year, as it retains many retailers who have actually profited from increased demand during the COVID-19 pandemic. More recently, the fund did what GameStop short sellers wanted, rising and falling with the video game retailer’s stock. But in a supposedly dying industry, the ETF did very well.
Beware of short selling
Betting against stocks can be profitable, but it involves high risks. Even when you make your short sales through a diversified ETF, you should be aware of the losses that you can suffer if you are wrong.
A tightening for these ETFs is unlikely. However, the gains that these ETFs have been providing to their shareholders lately only point to how dangerous short selling can be.