NEW YORK (Reuters) - The price of short-selling U.S. exchange-traded funds has jumped dramatically since the beginning of March as investors seek to stem heavy losses in the wake of the coronavirus epidemic, according to data from S3 Partners.
The average cost to borrow ETF shares for shorting rose to 105 basis points on Mar. 18 from 75 basis points on Mar. 1, a 40% increase, the market analytics firm said. The jump amounts to an extra $1.2 million a day in borrowing costs for ETF short-sellers as a group, or $443 million on an annual basis.
That’s “a noticeable hit to an investor’s or portfolio manager’s bottom line,” Ihor Dusaniwsky, S3’s managing director of predictive analytics, wrote in a research report on Thursday.
Investors who sell securities “short” borrow shares and then sell them in a bet that the assets will fall, so they can buy them back at the lower price, return them to the lender and pocket the difference. Increased demand to borrow assets can drive up the cost of doing so.
Short-selling can be used as a portfolio hedging strategy. As U.S. stocks have dropped 29% from their peak, other hedging strategies, such as options, have become expensive, making ETFs an attractive alternative, Dusaniwsky wrote.
The sell-off has also dried up liquidity and triggered price dislocations in fixed-income markets. Fixed-income funds feature heavily among S3’s list of the ETFs with the largest increases in borrowing fees in March.
The Invesco Senior Loan ETF BKLN.P had the biggest jump, with its borrowing fee rising 9.57 percentage points. The SPDR Bloomberg Barclays High Yield Bond ETF JNK.P, the iShares US Treasury Bond ETF GOVT.Z, the JPMorgan Ultra-Short Income ETF JPST.Z and the iShares iBoxx $ High Yield Corporate Bond ETF HYG.P were all in the top 10.
Even as ETF borrowing fees have jumped, they still are much lower than those for highly shorted single stocks such as SmileDirectClub Inc SDC.O, which has a 75% borrow fee. Market intermediaries can create ETF shares specifically for lending purposes, which helps to maintain the supply of ETFs available to short.
Indeed, certain ETFs, including the SPDR S&P 500 ETF Trust SPY.P and the Energy Sector Select SPDR Fund, have garnered inflows as a result of investors seeking to sell them short, said Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors.
But the supply of ETFs available for short-selling is coming under some pressure as long ETF investors exit their positions, according to Dusaniwsky.
“The cost of portfolio hedging will continue to increase and there will be scarcity of stock borrow supply in certain ETFs, primarily leveraged and niche ETFs, which are more difficult and expensive to create, hedge and lend out to the street,” he wrote.
Reporting by April Joyner; Editing by Alden Bentley and Cynthia Osterman
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