An ETF For A Tesla Short-Covering Rally

Shares of Elon Musk's Tesla Inc. TSLA are up more than 16 percent over the past 12 months, but that hasn't been enough to keep short sellers at bay. Data suggest short sellers remain active with Tesla despite rising borrow fees.

Investors looking to play a potential short-covering rally in Tesla via exchange-traded funds have a few options, but the best, at least in terms of Tesla heft, is the VanEck Vectors Global Alternative Energy ETF GEX. GEX tracks the Ardour Global Index Extra Liquid Index and allocates almost 10.6 percent of its weight to shares of Tesla. That makes GEX the ETF with the largest Tesla exposure.

GEX has traded slightly higher this year. The ETF holds 31 stocks, of which Tesla is the second-largest holding behind Vestas Wind Systems. Tesla is the most shorted U.S. stock, according to IHS Markit data.

Shorts Aiming At Tesla

“The current short borrow is 29.8m shares, up from 27.8 on March 15^th,” said Markit. “The next exchange short interest publish on March 26^th was collected for settlement on March 15^th, so it may print lower than the last observation, but given the increase in borrows since then, we predict the subsequent number released on April 10^th will reflect the recent increase in short demand. The current equity short balance is $9.4bn, making Tesla the most shorted US equity in dollar terms.”

Another ETF to consider for a short-covering pop in Tesla is the First Trust NASDAQ Clean Edge Green Energy Index Fund QCLN. Tesla is the third-largest holding in QCLN and the fund has the second-largest Tesla exposure among all ETFs behind the aforementioned GEX.

QCLN holds 39 stocks and follows the NASDAQ Clean Edge Green Energy Index. The First Trust ETF is slightly trailing its VanEck rival year-to-date.

Treading Carefully

Before piling into GEX and QCLN, investors should consider the emboldened nature with which short sellers are going after shares of Tesla and the company's corporate bonds.

“With the short demand for Tesla increasing through the recent sell-off - and the short demand for bonds fully utilizing the available supply - it appears short sellers are looking for more downside before they begin to cover,” said Markit.

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