The Art of Streetplay

Monday, October 17, 2005

Heavy Short Interest in ETF's

Sorry for the lack of entries of late. I can't talk about what I've been doing recently.

Interesting article today about short interest in ETF's. There apparently are now a half dozen ETF's with short interest levels greater than 100%, with the weighted average is around 21%. Needless to say it's concentrated in popular sectors which may require sector-specific hedging to remain sector-neutral-- gold and oil. I didn't even know it was possible for an ETF to have a short interest of 308% (Retail HOLDRS--'RTH').

I honestly am not sure what the profit implications are to an ETF sponsor with such high short interest. Are the economics the same? I would assume that healthy short interest would be a boon for ETF's, since one of their primary purposes is as a hedge. Again no need to beat a dead horse but I would hope that puts WSDT at a natural 21% discount to the average ETF... or else something is seriously wrong.

3 Comments:

  • Why is it that Barclay's hasn't started issuing ETFs to be traded by hedgies that exclude one stock from the index? It would seem to be a much better way to do stat arb, and I'm sure customers would line up for the service.

    By Blogger The Irrational Investor, at 1:22 PM  

  • This comment has been removed by a blog administrator.

    By Blogger The blogger, at 2:54 PM  

  • I know it's crass to mention it, but that much short interest is bullish...taken by itself without reference to stat arb or hedging.

    By Anonymous John Navin, at 2:57 PM  

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