Where the 'Shorts' Are in Popular ETFs

by: Gary Gordon

Is it ironic… or is it just the way things are? The ETFs with the heaviest short interest in 2010 represent some of the same sectors that bearish investors slammed in the 2008 meltdown.

For example, selling short the shares of the iShares Dow Jones Real Estate Fund (NYSEARCA:IYR) was an extremely popular and profitable move in the first 3 quarters of 2008. Two years later in 2010, IYR has one of the highest short interest ratios of “highly liquid” ETFs.

Betting on consumer weakness in discretionary/retail stocks was also in vogue the last time around. In my October 2007 feature, “A Weakening Consumer Presents Opportunity,” I discussed employing ProShares UltraShort Consumer Services (NYSEARCA:SCC). Today, Retail ETF alternatives like SPDR Retail (NYSEARCA:XRT) and the Retail HOLDRs (NYSEARCA:RTH) sit at the very top of short interest lists.

And who can forget the previously obscure term, “subprime”? In 2008, the greatest short-selling activity focused on the financial sector because of subprime loans on mark-to-market accounting books. Is it just a coincidence that the top leveraged ETF by fund flow… $450 million in 2010… is Direxion Daily Bear Financial Shares 3x (NYSEARCA:FAZ)?

Heavily Traded, Extremely Liquid ETFs With Noticeably High Short Interest
Short Interest Ratio
Retail HOLDRs (RTH) 6.75
iShares DJ Transportation (NYSEARCA:IYT) 6.68
SPDR S&P Retail (XRT) 5.80
iShares DJ Real Estate (IYR) 5.22
iShares Russell 2000 (NYSEARCA:IWM) 3.38

Short-sellers are significant players whether we’d like them to be or not. They’re not necessarily right, but their activity may influence parts of the market or the entire market. That’s why the list above is worthy of inspection.

Indeed, why is there so much interest in betting against the consumer as well as real estate? Are short-sellers entering a 2008 Hot Tub Time Machine? Or is the heightened interest because there’s a strong undercurrent of disbelief about housing stability and consumer purchasing power in the future?

When one looks at the other ETFs on the list, however, it appears that short sellers are also intrigued by other aspects of economic uncertainty. Shorting “transports” is a statement that the economy itself may falter. Moreover, shorting small-caps is a statement that unemployment is going to remain a problem, since 2/3 of U.S. jobs emanate from small companies.

Of course, some folks will say that popularity in short selling positions is merely a contrarian indicator. In other words… don’t follow this herd. Nevertheless, I’d keep an eye on any new developments; particularly, insider selling activity may be a potent resource going forward.

Disclosure Statement: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The company receives advertising compensation at the ETF Expert web site from Invesco PowerShares Capital Management, LLC. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.