This Year's Most Shorted ETFs

Retailers, regional banks, corporate bonds, homebuilders and biotech—those are some of the areas traders are betting against, according to ETF.com’s latest list of most-shorted ETFs so far this year.

“Shorting” is the process of borrowing a security, selling it immediately and then buying it back at a later date―preferably at a lower price. If done correctly, shorting is way to profit from a decline in the price of a security.

Of course, it doesn’t always work according to plan. If instead a security you shorted increases in price, you’ll have to buy it back at a higher price than you sold it at, resulting in losses. Theoretically, there’s no limit to how big those losses can be, because there’s no limit to how high a security’s price can climb.

That’s in contrast to a security bought normally, where “zero” is the limit on the downside.

Risky Trading Strategy

It’s a risky strategy that can backfire—as anyone who put an outright short position on the SPDR S&P Retail ETF (XRT) at the beginning of the year is well-aware. XRT has returned 13% so far in 2023, as optimism has grown that the economy may have weathered the Fed’s rate hike storm. It’s also the fund with the largest short interest percentage of all ETFs.

More than 18.8 million shares of XRT are being shorted, compared with 6.2 million total shares outstanding (it’s possible to have a short interest greater than 100% because shares can be continually borrowed and shorted, indefinitely).

Sometimes short positions are hedges or a part of a pair trade made by sophisticated investors. But in many cases, they are outright bearish bets against an ETF in expectation that prices will decline. When short interest is high, it may signal that traders are expecting a fall in the price of an ETF.

Unsurprising Targets

Given the nature of short selling, which requires a margin account and consistent monitoring of the position, it’s typically only done by active traders with a high-risk tolerance. Still, it’s a popular method of betting against ETFs.

It’s not surprising to see XRT be a popular target for short-sellers. Over the past several years, as consumers increasingly turned to online merchants to make their purchases, brick-and-mortar retailers shuttered their stores en masse (though that trend has at least temporarily reversed as consumers flock to physical stores in the aftermath of the pandemic).

Meanwhile, the SPDR S&P Homebuilders ETF (XHB) is another unsurprising entry on the most-shorted list. Existing home sales in the U.S. fell for a record 12-straight months through January. Housing affordability is at multidecade lows no thanks to surging interest rates, reducing the need for new homes from the homebuilders that make up XHB.

Shorting A Short

Then there is the Direxion Daily S&P Biotech Bear 3X Shares (LABD), which is an inverse ETN and an interesting product to see on the most-shorted list.

Inverse products are another way to bet against areas of the financial markets. These ETFs take on the underlying short positions so traders can effectively “go short” by “going long” these products. It’s a simpler process for those who don’t want to (or can’t) do the shorting themselves.

On the surface, it’s puzzling: Why would anyone short an inverse product?

But it makes sense when you consider that inverse products―and especially leveraged, inverse products―suffer from performance drag due to periodic (usually daily) rebalancing.

For some volatile products, that performance drag can be crippling. Case in point is LABD, which is down a whopping 97% over the past five years.

Betting Against Biotech & Housing

Turning back to the more vanilla products, there are some notable ETFs that short-sellers are betting against.

The iShares BBB Rated Corporate Bond ETF (LQDB) has a short interest percentage of more than 71%. This is an interesting fund to see on the list because it holds investment-grade bonds rated BBB. These bonds are the lowest rung of the investment-grade universe, making them vulnerable to falling into junk bond territory if economic conditions worsen.

By the looks of the high short interest in the ETF, at least a few investors are betting on that outcome.

The AXS 1.25X NVDA Bear Daily ETF (NVDS) and the GraniteShares 1.25 Long TSLA Daily ETF (TSL) are two of the handful of single-stock ETFs to find themselves on the most-shorted ETFs list. Like LABD mentioned above, these leveraged funds are subject to decay from daily rebalancing and by focusing on volatile single stocks, they are even more susceptible to that phenomenon.

The iShares China Large-Cap ETF (FXI) and the iShares Emerging Markets ETF (EEM) are two emerging market-focused ETFs with high short interest.

Finally, there’s the ProShares Bitcoin Strategy ETF (BITO), the first bitcoin ETF in the U.S., with a short interest of more than 31%.

For a full list of the most-shorted ETFs, see the table below:

Email Sumit Roy at [email protected] or follow him on Twitter sumitroy2