ETF Short Sellers Targeting Small Caps, Tech Stocks

Tech stocks once again led the market lower on Wednesday as the difficult September for Wall Street continued.

There is currently $185 billion in aggregate ETF short interest in the U.S. market, up from just $154 billion in March, according to S3 Partners. S3 analyst Ihor Dusaniwsky said Tuesday that ETF short interest has increased by $1.1 billion in the past week alone.

Most Shorted ETFs: By far the most heavily shorted ETF is the SPDR S&P 500 ETF Trust SPY. The SPY ETF tracks the S&P 500 and represents a simple bet against the U.S. stock market and/or a hedge against long positions in U.S. stocks. Here are the top four most shorted U.S. ETFs, according to S3:

• SPY ETF, $50 billion in short interest.
• PowerShares QQQ Trust, Series 1 QQQ, $16.5 billion in short interest.
• iShares Russell 2000 Index IWM, $15.6 billion in short interest.
• iShares MSCI Emerging Markets ETF EEM, $5.6 billion in short interest.

Recent Short Seller Targets: Overall, Dusaniwsky said traders have been ramping up diversified exposure to tech stocks in the past month.

“Tech stocks, which have been the backbone of this year’s rally, have been cooling off recently and short sellers are looking for exposure to the sector rather than throwing darts and hoping to pick the individual securities that are poised for a pullback,” he said.

Here are the four ETFs with the highest increases in short interest in the past 30 days:

• IWM ETF, +$1.2 billion.
• QQQ ETF, +$1.1 billion.
• Technology Select Sector SPDR Fund XLK, +$349.3 million.
• iShares iBoxx $ High Yield Corporate Bond ETF HYG, +$340.4 million.
• Short Covering ETFs: But while short sellers are generally leaning into the market sell-off, some ETFs have also been experiencing heavy short covering as well. Here are the ETFs with the largest drops in short interest in the past 30 days:
• SPY ETF, -$3.7 billion.
• iShares Core MSCI EAFE ETF IEFA, -$383 million.
• Vanguard Total Stock Market Index Fund ETF VTI, -$309.3 million.
• Utilities Select Sector SPDR Fund XLU, -$306.5 million.

Benzinga’s Take: The general theme of the information above is that investors are betting against riskier high-growth tech stocks and small-cap stocks. At the same time, they are reducing short exposure to diversified, broad market ETFs and defensive sectors, such as Utilities.

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