Please ensure Javascript is enabled for purposes of website accessibility

Short-Sellers Have These 3 ETFs in Their Sights

By Dan Caplinger - Feb 3, 2021 at 12:31AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Should investors watch for a squeeze?

Investors are paying more attention than ever to the practice of selling stocks short. The risks involved in short-selling have never been more evident, as the recent short-squeeze on GameStop (GME -8.87%) and other stocks shows. Now, some investors are looking for other heavily shorted securities to see if they can duplicate their success in pushing GameStop's share price up so dramatically, at least temporarily.

Although many short-sellers focus on individual stocks, others prefer to work with exchange-traded funds. Three ETFs in particular have seen extremely large short interest figures lately, and that has some wondering whether there's an opportunity either to jump on the short bandwagon or to bet against shorts by buying shares. Let's count down the ETFs with the greatest percentage of their floats sold short.

Person holding gun with green laser sight.

Image source: Getty Images.

3. SPDR S&P Oil & Gas Exploration & Production

In the bronze-medal spot on the short-sold ETF podium right now is SPDR S&P Oil & Gas Exploration & Production ETF (XOP -3.29%). It currently has short interest of around 35.6 million shares. That works out to 91% of the fund's roughly 39.1 million shares outstanding.

It's easy to understand why investors are targeting this ETF. Energy stocks have seen a lot of pain over the past 12 months, and the ETF was down as much as 60% shortly after the beginning of the COVID-19 pandemic. Oil prices even went negative briefly, causing smaller exploration and production companies to founder, and even shaking many oil majors.

More recently, though, short-sellers have gotten punished by the oil and gas stock ETF. Shares have rebounded 66% in the past three months, as oil prices have recovered above the $50 per barrel mark. Industry analysts increasingly believe that conditions in the market might be improving for the long run.

Nevertheless, there's still plenty of uncertainty in the oil and gas sector. That explains why so many people are betting against the E&P segment. If the energy industry can't sustain its recent recovery, then a new downward wave for oil and gas stocks could work in short-sellers' favor.

2. SPDR S&P Biotech

SPDR S&P Biotech (XBI -5.02%) earns the second spot in this list of top short-sold ETFs. The fund has a whopping 103% of its 48.8 million outstanding shares sold short. This is possible because shares can get lent more than once, and the liquidity that stems from ETF share creation and redemption gives institutional investors far more flexibility than they get from short-selling individual stocks.

The biotech ETF is equal-weighted, and one reason it's gotten attention is that it has some stocks that short-sellers have focused on. For instance, Ligand Pharmaceuticals (LGND -8.81%) has been in the short-sale spotlight lately, with 62% of its outstanding shares sold short as of mid-January. Demand for Captisol, a cyclodextrin product used for stability and solubility of active pharmaceutical ingredients, jumped last year due to COVID-19-related development. Some wonder if that spike could prove to be short-lived.

That said, SPDR S&P Biotech has been a strong performer, rising more than 80% in the past year and 15% just since the beginning of 2021. It's hard to foresee a major reversal that would justify short-sellers' interest in the ETF.

1. SPDR S&P Retail

Easily taking the top spot is SPDR S&P Retail ETF (XRT -8.29%). The ETF had an unbelievable short-interest ratio of 465% recently, with more than 12 million shares short and only 2.6 million outstanding.

The explanation for interest among short-sellers here is even more obvious. The equal-weighted ETF counts GameStop among its holdings. When short-selling investors couldn't directly borrow GameStop shares, going indirectly through this ETF made a lot more sense. When GameStop's share price jumped, it briefly made up more than 20% of the ETF's assets.

The SPDR S&P Retail ETF might seem like a reasonable short candidate given the woes that retailers have had. But the fund is actually up nearly 80% over the past year, as it holds many retailers that actually cashed in on rising demand during the COVID-19 pandemic. More recently, the fund has done what GameStop short-sellers wanted, rising and falling with the shares of the video game retailer. But in a supposedly dying industry, the ETF has done quite well.

Beware of short-selling

Betting against stocks can be lucrative, but it comes with high risks. Even when you do your short-selling through a diversified ETF, you have to be aware of the losses you can suffer if you're wrong.

A squeeze for these ETFs is unlikely. Yet the gains that these ETFs have given their shareholders lately only accents just how dangerous short-selling can be.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Ligand Pharmaceuticals Incorporated Stock Quote
Ligand Pharmaceuticals Incorporated
LGND
$82.97 (-8.81%) $-8.02
GameStop Corp. Stock Quote
GameStop Corp.
GME
$91.48 (-8.87%) $-8.90
SPDR Series Trust - SPDR S&P Retail ETF Stock Quote
SPDR Series Trust - SPDR S&P Retail ETF
XRT
$62.73 (-8.29%) $-5.67
SPDR Series Trust - SPDR S&P Oil & Gas Exploration & Production ETF Stock Quote
SPDR Series Trust - SPDR S&P Oil & Gas Exploration & Production ETF
XOP
$136.03 (-3.29%) $-4.63
SPDR Series Trust - SPDR S&P Biotech ETF Stock Quote
SPDR Series Trust - SPDR S&P Biotech ETF
XBI
$67.87 (-5.02%) $-3.59

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
349%
 
S&P 500 Returns
122%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/19/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.