ETF Short Reports
Short Report: Pressure On EEM Drops
April 12, 2011
Short-sellers give emerging markets a break, and start betting against T-Bonds and the yen.
Short-sellers took off some of the pressure they had been putting on emerging market stocks last month, amid signs that markets began to take news of unrest in Libya and in the Middle East in stride.
The diminishing pressure from short-sellers, a continuation of a trend that reared its head in February’s “Short Report,” dovetailed well with March flows data showing that investors were moving back into developing market equities via broad-based funds as well as country-specific ETFs.
Investors are again betting that emerging market countries such as China and India are likely to grow at a faster rate than developing economies, which are still slowly working their ways out of a slowdown related to the collapse of global credit markets in 2008. In January, investors had turned on developing markets in general amid upheaval in countries such as Egypt, Libya and Bahrain.
But that bearishness reversed in a big way in March, with short interest on the iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM) tumbling 34 percent last month after edging down 4.5 percent in February. The percentage of EEM’s shares that are short meanwhile fell to 7.5 percent from 11.4 percent in the prior month.
More broadly, investors also seem to be betting that the U.S. economic recovery will last, as a 23 percent jump in short interest in the iShares Barclays 20+ Year Treasury Bond Index Fund (NYSEArca: TLT) suggests. Bond prices tend to fall as economic growth leads central banks to raise rates in order to keep a lid on inflationary pressures.
The short-selling pressure some of the bigger U.S. equity ETFs came under in February meanwhile diminished in March. For example, short interest in the SPDR S&P 500 ETF (NYSEArca: SPY) rose just 4 percent last month after rising more than 17 percent in the prior month.
Our “Big Bets” table below highlights the changes in EEM, TLT and SPY.
Shorting The Yen
Japan also came into focus in March, as the Currency Shares Japanese Yen ETF (NYSEArca: FXY) came under pressure from short-sellers. The number of shares being sold short almost doubled. That jump meant that, at the end of last month, short interest stood at 129 percent of FXY’s outstanding float.
That increase in short selling was in contrast to the powerful flows into Japanese equities last month. Those equity flows reflected the market’s conviction that Japanese stocks were likely to flourish in the longer term, as the country recovers from the March 11 earthquake and tsunami that has also created an electro-nuclear catastrophe as bad as the one in Chernobyl, Ukraine in 1986.
The pressure on the yen suggested the possibility that some were betting Japan’s currency might weaken as the government and corporations there start selling yen to buy dollars as they look to import commodities priced in dollars that are crucial to its rebuilding efforts.
FXY’s changing fortunes are displayed in our “Really Really Short” table at the bottom of this story.
XRT, The Short-Seller’s Tool
IndexUniverse’s “Short Report” wouldn’t be complete without mentioning the SPDR S&P Retail ETF (NYSEArca: XRT), which is almost always perched atop our “Really Really Short” table.
Short interest in XRT climbed 11 percent in March after dropping 8 percent in February, and the percentage of shorts relative to outstanding longs stood at 368 percent. The ETF remains one of the most popular ETFs among hedge funds and institutional investors looking to hedge exposure to the retail sector.
Its assets under management and its short interest bounce around with a lot of volatility. But, as officials at XRT’s sponsor, State Street Global Advisors, outlined in a recent white paper, the ETF still reliably delivers the returns of its underlying index to buy-and-hold investors, thanks to the creation/redemption mechanism that undergirds all ETFs. XRT’s returns have exceeded 20 percent in the past year.
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