WSJ staff writer Ian McDonald reports (paid subscription required) that a large percentage of ETF assets have been sold short. Numbers and analysis:
McDonald writes that:
Of the 10 largest ETFs by assets, more than 20% of their shares were accounted for by short-sellers through the middle of this month [August], according to ETF Consultants LLC in Summit, N.J. By way of comparison, short sales typically comprise 1% to 2% of the average stock's shares outstanding.
Specifically, short interest numbers for some popular ETFs are:
- TLT - 136%
- IYR - 106%
- IWM - 73%
- QQQQ - 45%
- SPY - 30%
- DIA - 24%
- IVV - 3%
Question: Do these numbers show that many professional investors (most short sales are by professional rather than retail investors) are bearish on long term bonds, REITS and US small cap stocks? That's an important question because short interest is a contrarian data point. (The more negative current sentiment, the more more an asset class can rise.)
Answer: Yes and no. Many long-short hedge fund managers use ETFs to hedge long positions. Say you own a bunch of small cap stocks, and you want to hedge your position so that your portfolio is market neutral. Then IWM is an ideal way to do that, particularly if (a) you lack short ideas for individual stocks or (b) it's hard to borrow small cap stocks to short. This would imply that fund managers may not be bearish on those asset classes, but rather find that ETFs are the most convenient instrument for hedging.
At the same time, it's unlikely that TLT is used for hedging long duration government bonds, because there's not enough variance between the bond index and the individual bonds to justify that strategy.
Upshot? The short interest data is inconclusive evidence about sentiment on small cap stocks and REITs, but suggests that many professional money managers are bearish on long term bonds.
Related: I've just added a page to ETF Investor that lists about 260 ETFs and Closed-End Funds, with links to articles about each one. I'd welcome comments to let me know what you think and how I can improve it.