Photographer: Alessia Pierdomenico / Bloomberg
Photographer: Alessia Pierdomenico / Bloomberg
While the GameStop Corp. saga continues to unfold in the markets, the drama has cost almost 80% of its assets to a $ 800 million exchange-traded fund.
Investors withdrew approximately US $ 700 million from the SPDR S&P Retail ETF (ticker XRT) this week, draining total assets to just $ 164 million. Exit flows come after GameStop’s rise increased its weight in XRT to 20% – given that the fund follows an equal weighting index, the weight of the video game retailer should be close to 1%.
Theories abound as to what motivated the outflows, as they happened alongside a nearly 20% rally in the XRT just this week. One possibility is that, since XRT redemptions are delivered in cash – meaning that their shares are exchanged for the underlying shares of the fund – investors are abandoning the ETF to get their hands on GameStop shares that are difficult to borrow. Others postulate that, with such weight for the highly volatile GameStop, some holders may be choosing to make a profit.
Bloomberg Intelligence analysts support the first theory. “GameStop’s rising loan rates signal a high demand for shares, with short selling hedge funds potentially looking to close or adjust positions,” BI analysts James Seyffart and Eric Balchunas wrote in a Friday report. “The cash bailout was probably an attempt by investors to get their hands on GameStop’s scarce stock.”
The cost of borrowing GameStop’s shares rose to 200% this week, and was around 50% on Friday, according to data from financial analysis firm S3 Partners.
This is compounded by the fact that there are not many GameStop shares out there. The company has a relatively small float, with only 69.7 million shares outstanding. And with more than 100% of the total loaned to bears betting against him (shares can be borrowed more than once), this created a search for shares, according to BI.
But Matt Bartolini of State Street said there are probably many motivations at work, rather than a desire for GameStop actions. One consideration is that GameStop’s heavyweight has increased the overall volatility of the XRT, prompting investors to look for other vehicles for exposure to the retail sector.
“They are more risk-averse investors who are not looking to speculate, who are probably playing some kind of trend that started the year, such as the economic recovery,” Bartolini, head of SPDR Americas Research, said in a telephone interview. “As a result of this price appreciation, this investment thesis has now been distorted.”
Others think that outflows may simply be investors making profits after an incredible run. XRT gained about 40% in January, on its way to its best month ever.
“Anyone who did XRT for a long time BEFORE it all started had a reason. Whatever the reason, it was not to win with a mechanical pop in a meme stock that happened to be in, ”Dave Nadig, investment director at data provider ETF Trends, wrote by email. “So it’s 100% pure profit.”