ETF Short Interest Climbed to $176.5 Billion in October

Investors bet heavily against exchange-traded-funds (ETFs) in October to shield their portfolios from market turmoil.

Short interest in ETFs rose $11.7 billion to $176.5 billion last month, according to data from S3 Analytics, with most of this growth heavily concentrated in a handful of funds. The New York-based financial technology and analytics firm revealed that the top 25 most-shorted ETFs made up 75% of total short interest, seeing a $12.1 billion increase over the prior month.

The two biggest shorts, SPDR S&P 500 ETF (SPY) and Invesco QQQ (QQQ), were funds that track major U.S. indices. Bets against both SPY and QQQ -- an exchange-traded fund based on the Nasdaq 100 Index -- rose about 6% in October. Those calls turned out to be smart ones, generating returns of 8.20% and 9.80%, respectively.

The third biggest short, the iShares Russell 2000 ETF (IWM), also underperformed in October, earning its short sellers an 11.34% return. Interestingly, short interest in the fund, which tracks the bottom 2,000 stocks in the Russell 3000 Index, declined in October.

Data revealed that the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), SPDR S&P Regional Banking ETF (KRE) and the iShares 20+ Year Treasury Bond ETF (TLT) rounded out the top five most-shorted funds ranking. 

In aggregate, the top 25 most-shorted ETFs generated $9.2 billion in mark-to-market profits. A 6.99% return in October was achieved despite a handful of ETFs in this group rising.

Investors that bet against Utilities Select Sector SPDR ETF (XLU), the iPath S&P 500 VIX Short-Term Futures ETN (VXX), the Consumer staples Select Sector SPDR ETF (XLP), the iShares MSCI Brazil ETF (EWZ) and the SPDR Gold Trust ETF (GLD) posted losses.

“In October, short sellers were looking for more short exposure in the more crowded equities (both retail and indexed), energy and healthcare stocks; international stocks and bonds;  and VIX volatility while decreasing short exposure to the broader U.S. market and U.S. interest rate related securities," said Ihor Dusaniwsky, managing director at S3 Partners. “If the market stabilizes and continues its rally, there may be $21 billion of October short sales ready to be covered and boost the rally even further.” 

Source: S3 Partners