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The decline in volatility throughout the month of December was preceded by a decline in short positions for most of the actively traded ETFs. Short positions decreased for 6 of the most actively traded ETFs between November 30 and December 15. Conversely, ETFs for the technology, MCSI, materials, and industrial (select) saw an increase in the short position.

#

Fund

Short Rank / 100

Dec. 15 2011

% Change

1

iShares MSCI EAFE Index Fund

26

46,821,546

33.2%

2

SPDR Select Sector: Technology

79

27,469,057

21.5%

3

SPDR Select Sector: Industrial

39

38,496,601

8.5%

4

Materials Select Sector SPDR

56

31,876,206

5.7%

SPDR Select Sector Fund - Consu

77

27,793,722

4.5%

SPDR S&P Regional Banking ETF

22

50,464,798

2.9%

5

iShares Russell 2000

2

207,022,107

-6.5%

6

iPath S&P 500 VIX Short Term Fund

50

33,345,958

-7.2%

7

SPDR S&P 500

1

423,412,072

-7.5%

8

iShares MSCI Brazil Index Fund

92

24,793,843

-8.9%

SPDR S&P Retail ETF

19

52,651,695

-10.2%

SPDR S&P Oil & Gas Explor & Pro

42

36,514,943

-10.8%

iShares Dow Jones U.S. Real Est

53

33,016,081

-16.3%

9

SPDR Select Sector Fund - Energy

24

48,290,631

-18.6%

10

SPDR Select Sector Fund - Financial

3

197,411,642

-20.1%

11

iShares MSCI Emerging Index Fund

25

47,163,795

-22.2%

SPDR Select Sector Fund - Healt

69

29,014,431

-23.9%

Short position Source: Bloomberg

The year-to-date performance for the ETFs is illustrated below:

Click to enlarge

Chart Source: Yahoo Finance

Monthly performance:

Click to enlarge

Chart Source: Yahoo Finance

What does the decline in bearish positions for ETFs mean for investors?

[1] The MCSI EAFE ETF (EFA) saw short interest increase 33% to 46.8M shares. The ETF has a high representation for Europe (especially the U.K.) and Japan. Sector weighting is highest for financials. It comes as no surprise that bearish investors increased a bet against this region. Negativity surrounding this region is expected to continue in 2012. A large portion of sovereign debts mature in the Q1-2012. European nations are at risk of facing higher debt renewal rates.

Like EFA, short interest for [2] SPDR Select Sector Fund - Technology (XLK) increased. With 27.5M shares in short interest (up 21.5%), the ETF price is almost flat for the year. The ETF is heavily weighted with Apple (AAPL) at 13.81% of holdings and IBM at 8.75%. Oracle (NYSE:ORCL)(4.86%) contributed to the flat return for the ETF as the company traded down (at $25.51) for the year. The majority of holdings are U.S.-listed.

Closing at $33.54 and down 1.73% for the year on December 28, [3] SPDR Select Sector: Industrial (XLI) saw an 8.5% increase in shares short. The industrial sector is expected to perform poorly, dragged down by Europe. Similarly, the [4] Materials Select Sector SPDR (XLB) has a short share volume of 31.9M, up 5.7%. [5] iShares Russell 2000 (IWM) best represents the health of the economy and is down 4.87% year-to-date. With 207M outstanding, the Russell 2000 has the second highest in shares short after [6] SPDR S&P 500 (SPY).

U.S. markets are struggling to hold a gain for 2011. The S&P ETF closed recently at $124.83, and tried more than 3 times to break this level in the last 3 months of the year. Weak housing figures and higher U.S. debt limits will weigh on the index. Improving consumer confidence and spending will lend support to this ETF.

A notable decline in shorting activity occurred in poorly performing sectors for 2011. As oil prices rose, the [7] SPDR Select Sector Fund - Energy (XLE) short position declined to 48.3M, down 18.6%. The energy ETF is flat for the year, closing recently at $68.45. Its largest holding is Exxon Mobil Corp (XOM) at 19.17% by weight and Chevron Corp (CVX) at 15.26%.

Despite ongoing weakness for bank shares, short covering for [8] SPDR Select Sector Fund - Financial (XLF) resulted in a 20.1% decline in shares shorted. Wells Fargo (WFC) is the largest holding (9.46%) for the ETF. Losses in Bank of America (BAC) and Citigroup (C) may continue to weigh on this ETF. The fund is down 18.01% for the year, closing recently at $12.87.

The greatest concern facing the Financial ETF is the mortgage appeal against Bank of America. The bank negotiated an $8.5B settlement that would have limited the liabilities at the Countrywide Financial unit. Unfortunately for the bank, the Circuit Court of Appeals will add to the unknown risks for Bank of America.

[9]MSCI Emerging Markets Index Fund (EEM) saw a shorts decline by 22.2%. The ETF closed recently at $37.48. China represents 17.55% of the ETF. China allowed its Yuan to appreciate in 2011, as a way of controlling its inflation rate.

Source: What A Change In Bearish Bets Means For These ETFs