Overview of the Most-Shorted ETFs

According to ETF.com, some of the most-shorted exchange-traded funds (ETFs) focus on spaces as diverse as junk bonds, retailers, natural gas and semiconductors, among other areas. Traders engage in "shorting" when they borrow a security, sell it and then buy it back at a later date and hopefully at a lower price. It is one of the most common ways to profit from a drop in price of a security.

Shorting can be done with individual securities or with the basket of securities represented by an ETF. In this case, an investor shorting the ETF is wagering that the securities held by that fund will decrease in price overall. If they do, the investor stands to make money; if not, though, and the prices of the securities increase, the investor could lose out. (See also: Shorting ETFs: Profit or Peril?)

The most-shorted ETF is the VanEck Vectors Semiconductor ETF. According to the report — which uses Bloomberg data as of July 24, 2018 — more than 20.2 million shares of SMH are being shorted; there are just 9.6 million total shares outstanding. The investors shorting SMH have likely expected that the price of the ETF will drop at some point in the future. For the time being, though, these investors are likely unhappy with their decision; SMH has returned about 9% so far in 2018 thanks to a larger rally across the tech sector. (See also: The Industry Handbook: The Semiconductor Industry.)

Another popular ETF among investors interested in playing the shorting game is the SPDR S&P Retail ETF. Retail has long been a troubled sector, particularly as investors have turned more and more to online merchants as a means of doing their purchasing. Brick-and-mortar retailers as a group have been struggling, with many store locations shut in recent months and years. Still, according to ETF.com, the year-to-date return for XRT is an impressive 13.56%. This highlights a broader issue with shorting an ETF; unlike an individual name, the ETF is designed to balance out a variety of holdings in an effort to maximize returns. Individual stocks within the ETF's basket that struggle can be reallocated or even shifted out altogether in some cases. (For more, see: 6 Retail Stocks to Lead as Economy Picks Up Speed.)

Another exchange-traded product that is commonly shorted in 2018 is the iPath S&P 500 VIX Short-Term Futures ETN. The Cboe Volatility Index, commonly referred to as the VIX, is a popular tool for investors looking to gauge volatility in the markets. VXX Tracks VIX futures; someone who shorts the VXX is effectively shorting the VIX. Given recent turbulence in the political and macroeconomic spaces, it's not surprising that there is interest in shorting VXX at this time. (See also: How to Profit From Market Volatility Using ETFs .)

A fourth exchange-traded product on the most-shorted list this year is the VelocityShares 3X Inverse Silver ETN. As an inverse ETN, it's somewhat unusual to see this fund on the list. Inverse products are designed to be ways to bet against portions of the market; in a sense, they are already attempting to achieve the same effect that shorting does. ETFs in this category take on underlying short positions; when a trader buys into the inverse product, he or she thus "goes short" on the names in its basket. Why would investors go short on a product that already shorts in this way?

Inverse ETFs and their kin tend to suffer from performance drag as a result of periodic rebalancing. In some cases, this drag can actually cause massive losses when the product can't keep up with what's going on in the market. For this reason, it's not uncommon for investors to look to short these products; perhaps it's best seen not as a bet against a shorted name but rather as a bet against the efficiency of the ETF itself. There are seven leveraged or inverse funds out of the 20 most-shorted ETFs for the year so far. (For additional reading, check out: The Risks of Investing in Inverse ETFs.)